Avoid costly, panic-driven investment decisions during a crisis and remain focused on the long term

• Stress, Anxiety, and Crises
• The Risk of Mistakes
• Maintaining Perspective in Crises

In any crisis, “playing it safe” to avoid losing your money can seem like the only rational strategy. However, in the past 60 years, we’ve seen repeating patterns of crises. Despite these crises, the market has been resilient. The Dow Jones Industrial Average rose from 679 points in 1959 to over 38,000 in 2024. Regardless, of the type of crisis, history shows that long-term investors who stayed the course through crises and didn’t lose sight of their financial goals have been rewarded.

First, Stress, Anxiety, and Crises

When crises hit, news ratings surge. For example, in the early days of the global pandemic, from March 16-20, 2020 Fox News saw its ratings climb 89% over the prior year period, while CNN was up 193%, and MSNBC climbed 56%.

In addition to more news consumption, we’re searching CNBC more often to see how the market is performing. All this news watching and Googling can make us more anxious about the economy.

When we’re anxious, we’re more likely to allocate our attention to negative information. Given the choice between information that may offer an optimistic perspective or data that paints a bleak future, an anxiety-influenced investor may naturally focus on threatening information.

Let’s face it, there are good reasons to be anxious about a crisis’ effect on our economy. When anxiety increases, many investors respond by trying to make their portfolios safer. In 2024, total assets in cash investments reached an astounding $18.9 trillion. Cash investments may provide a sense of security because of their perceived benefit of principal stability.

Making a portfolio safer seems perfectly rational during a crisis. Nobody likes losing money, especially when the market plunges. The pain of losing money is psychologically about twice as intense as the pleasure of gaining it. When the market drops 30% or more, that pain and temptation to make a portfolio safer can intensify. Since 1960, the market dropped more than 30% seven times.

Although safer investments can calm our anxiety when the market’s tumbling, choosing safety can be a mistake for long-term investors. The graph below illustrates how a hypothetical “reactionary” investor, who made their portfolio safe when the market dropped 30%, missed gains time and time again during market recoveries. The reactionary investor traded long-term results for short-term comfort.

Third, Maintaining Perspective in Crises

Nobody likes to go through a crisis alone. Trying to manage your investments by yourself in a crisis, with extreme market volatility, can be mind-boggling. In March of 2020, the Dow swung several times between 6–12% a day in both directions. One day the Dow Jones Industrial Average was down 2,000 points and a few days later up 2,000 points. It can be unnerving to hear “worst day ever” and then “best day ever” in terms of market point moves.

Many investors try to time the market’s ups and downs and change their portfolio investments accordingly. Research shows that this strategy hasn’t worked well for investors. Dalbar’s Quantitative Analysis of Investor Behavior studied has measured the effects of investor decisions to buy, sell, and switch into and out of mutual funds over short and long-term time frames. The results consistently show that the average investor returns are less—in many cases, much less—than market indice return.

Hopping in and out of investments to prevent losses or capture gains can be a primary reason why investors have underperformed the market. Anxious investors tend to overestimate the risk of holding stock investments and underestimate the risk of not holding them.

Over the past 30 years, the average equity fund investor earned a 10.00% annualized return vs. a 10.92% annualized return of the S&P 500 Index. The average bond investor earned -0.5% vs. a 4.56% return of the Bloomberg US Aggregate Bond Index. The bottom line: investor behavior can determine success more than investment performance.

That’s why it’s important to have the support of a financial professional who can help you control impulsive reactions to market volatility and practice disciplined investing. In addition to helping you find appropriate investments for your financial goals, your financial professional plays a more crucial role by acting as a counter to the market’s mind games that can tempt even experienced investors.

“But it’s Different This Time”

Many feel that the current crisis is different than previous crises. It is. Every crisis is different. With all the news coverage, we can feel like today is bad and tomorrow will be worse. It’s easy to get overwhelmed with pessimism. But despite all the bad news, there’s amazing innovation taking place that won’t get media attention.

For example, Elon Musk’s Neuralink developed brain-computer interface, connecting brains to computers for improved cognition and treatment of neurological disorders. Many customers love self-driving robotaxis. In August, Waymo provided nearly 500,000 rides in California. Uber and Lyft will join soon. Meta will build the world’s longest undersea cable to improve the world’s digital highways. Agentic AI focuses on action and decision-making, adapting to environments. These agents plan trips, serve as virtual caregivers, and optimize supply chains, autonomously solving problems and transforming industries.

The US has experienced 26 bear markets since 1929. Our recovery record? 26 for 26. While we can’t predict the future, as Warren Buffett has said, “It’s never paid to bet against America.”

Three Things to Remember About Maintaining Perspective

First, crises influence us to focus on the negative. The flood of 24/7 crisis news coverage can contribute to our anxiety about the economy. Second, anxiety makes us more vulnerable to making investment mistakes that can damage our long-term results. Third, consider working with a financial professional to help you maintain a long-term perspective through the crisis.