Emotional Coping Strategies for Financial Turmoil

Did you ever feel your stomach drop when investing plunged? Have you ever felt a rush of excitement or a stomach drop when your investments soar? You are not alone. Even the best investment plans can be ruined by powerful emotions.

We'll talk about the reasons why you react this way, and more importantly, how to keep calm when markets are crazy. - Learn more about Affirm Wealth Advisors

Your Brain can undermine your investment

Your relationship with money goes beyond numbers. You're shaped by the whole of your life.

Your financial decisions are driven by hidden forces

Do you think that your financial decisions are rational? Think again. The majority of financial decisions are subconscious.

• The brain feels losses more intensely (losing $1000 feels worse than winning $1000 feels good).
• Market crashes become real threats with the help of evolutionary wiring
• Fear and greed influence more investment decisions compared to logical analysis

How your financial past shapes your present

Remember the way money was talked about in your childhood? The early financial lessons you learned still affect how you react today to market changes.

• Early money experiences can create neural pathways for many decades.
• It is difficult to overcome the biases that are formed by experiencing market crashes.
• Your financial history has a greater impact on your risk appetite than any class in finance

Why knowing better doesn't mean doing better

Even though you may know exactly what to invest in, it doesn't mean you'll follow through. It's easy to see why even experts in finance make poor decisions when their emotions are high.

• Market panic can override rational thinking in seconds
• Knowledge gaps are costly to investors, but implementation gaps are more expensive.
• It is rare that information alone will change deep-seated behaviors.

Behavioral finance: The science behind market madness

Traditional economics assumed we were all rational investors. Behavioral finance shows how emotions drive market moves.

From Rational Theory towards Emotional Reality

Researchers first noticed a pattern of irrational finance behavior.

• Classical economics couldn't explain why markets consistently overreact
• The 1970s saw the revolution in understanding brought about by psychologists Kahneman & Tversky
• The 2008 financial crash pushed behavioral financing into the mainstream

Why Markets Aren't Always Rational

In spite of what textbooks tell us, markets aren’t always efficient. Human psychology creates persistent inefficiencies:

• Assets are often mispriced due to emotional reactions
• Investor herding causes boom-bust cycles that go beyond fundamental values
• Market crashes and bubbles are due to psychological factors

Key Principles Every Investor Should Know

Understanding these core concepts helps you recognize when emotions might be clouding your judgment:

• Loss aversion - Losses hurt twice as much as gains of the same value.
• Recency bias: Too much emphasis on recent events
• The anchoring effect is when decisions are tied to arbitrarily chosen reference points, rather than fundamentals.

The Emotional Traps of Investing We All Fall into

Your brain has built in shortcuts that may have helped our ancestors, but could also be destroying your investment returns. Let's uncover these biases, so that you can overcome.

Make Money-Worrying Mistakes based on Fear

Fear of losing money is more common than other emotions.

• Loss aversion makes you sell winners too early and hold losers too long
• Risk aversion increases precisely when opportunities are greatest
• The inflationary effect of catastrophizing can lead to excess cash balances.

When Greed Takes the Wheel

Optimism bias tricks you into taking excessive risks during bull markets:

• Overconfidence can lead you to overestimate and underestimate your abilities, as well as risks.
• Fear of missing out (FOMO) is what drives you to pursue performance in hot sectors
• Selective memory helps you forget past mistakes during market euphoria

The Cognitive Blind Spots of Every Investor

You are constantly seeking information to confirm what you already think.

• Confirmation bias causes you to ignore warning signals in investments you like
• Mental accounting causes inconsistent risk approaches across different accounts
• The sunk cost fallacy is a myth that keeps you bound to losing strategies, because "you have invested so much"

Four Market Cycles with their Emotional Rollercoaster

Psychological cycles are just as predictable in the market as price patterns. Recognizing which emotional stage the market is in gives you tremendous advantage.

Bull Market Psychology - The dangerous path to euphoria

Bull markets tend to follow an emotional progression that is predictable:

• Early optimism presents solid opportunities at reasonable prices
• Middle appreciation increases comfort but builds insecurity
• The euphoria of the moment is a warning sign that rationality has been abandoned.

Bear Market Psychology: From denial to opportunity

Bear markets can cause predictable emotional reactions.

• Investors are unable to accept the decline of markets and continue to hold their full investment.
• Fear triggers widespread selling as losses accelerate
• When the pessimism reaches its maximum, capitulation can create the most opportunities

Psychologically detecting market turning points

Investor psychology is the first to change, followed by prices.

• Excessive optimism can signal the top of the market before it actually peaks.
• Widespread capitulation typically precedes market bottoms
• Sentiment indicators can often predict price movements weeks or months in advance

How to deal with your emotions in a market turmoil

You can learn to control your emotions when markets swing. These techniques will help you stay rational in turbulent markets.

Mindfulness practices that improve investment decisions

By becoming aware of your emotional reactions, you can make rationaler decisions.

• Regular meditation improves emotional regulation during market stress
• Body scanning can help identify anxiety and its impact on your decisions
• The use of emotional labels ("I feel fear right now") can reduce the intensity of a reaction

Why Investment Journaling Can Transform Your Results

This simple exercise dramatically improves your decision-making quality.

• Your investment journal is a record of your thoughts and ideas.
• Tracking emotions alongside decisions reveals harmful patterns
• Regular reflections can help you identify your personal triggers for financial decisions.

The Power of Psychological Distance

Viewing market volatility from a detached perspective reduces emotional reactivity:

• Imagine that you are giving advice to your friend, not yourself
• Consider decisions in the third person ("What should Jane decide?").
• Visualize your future-self to put long-term outcomes above short-term emotional responses

Build an investment strategy that works with your psychology

The best strategy for investing takes into account your psychological tendencies. Aligning the approach to your emotional realities can improve long-term results.

Investing Rules-Based: Emotional Circuitbreakers

Clear investment guidelines established in advance help prevent emotional override.

• Pre-commitment strategies prevent impulsive decisions during volatility
• When emotions resist, rebalancing rules force a contrarian response.
• Systematic investment plans eliminate timing decisions entirely

Finding Your Sleep at Night Factor

The right position sizing lets you stay invested even during market turbulence:

• Positions of small size to prevent panic during downturns
• Diversification decreases emotional attachment towards individual investments
• Risk management prevents catastrophic losses that lead to abandonment

Matching the emotional capacity of a person to their timeframe

Different time horizons require different psychological approaches:

• A longer time horizon reduces emotional reactivity towards short-term volatility
• Stability is improved by using different strategies to achieve various goals
• Preparing mentally for volatile reactions reduces the surprise of unexpected reactions

The Social Side of Market Psychology

Markets are social institutions in which collective psychology is what drives price movement. Understanding these dynamics will help you resist unhealthful social pressures.

Why We Can't Help Following the Herd

Humans evolved to be a group-following species for safety.

• Social proof drives investors toward popular investments near market tops
• Herding helps explain why markets can overshoot to both directions
• When herding behavior is extreme, there are many opportunities for contrarian thinking

Media Narratives: How they Influence Market Movements

Financial media amplifies emotional extremes through compelling stories:

• Reporting on the market is always a follower, not a leader.
• Media narratives simplify complicated dynamics into dramatic storylines
• Headlines impact your emotions more when markets are stressed

You Can Still Think Independently when Everyone Agrees

The courage to think independently creates significant advantages:

• Cultivate a diverse information diet to reduce narrative capture
• To strengthen your investment thesis, look for evidence that contradicts the current beliefs.
• Market extremes are best suited for contrarian thinking

How to have a healthier relationship with money

Your overall relationship with money will shape your investing experiences. Clarifying the money philosophy you follow can help improve your decision making during market fluctuations.

Redefining wealth on your terms

Wealth means something different to everyone.

• Financial freedom provides more satisfaction than pure accumulation
• Understanding your "enoughness" can reduce harmful comparisons
• Absolute wealth may not be as important as control over your time

Align Your Money With Values

Investment decisions reflect your deeper values:

• Value-aligned investing reduces cognitive dissonance when volatility occurs
• Personal commitment provides stability in turbulent markets
• The ethical considerations of long-term strategies create a greater commitment

Find Your Balance Today and Tomorrow

Money is used to meet both current and future needs.

• The over-saving of money could lead to unnecessary present sacrifice
• The future anxiety of not saving enough can reduce the enjoyment you get today
• The individual balance point is determined by your circumstances and values

The Emotional Health Management System: Your Action Plan

When theory is implemented, it becomes more valuable. Let's develop a personalized strategy for emotional management.

Develop Your Investor Statement

When the market is turbulent, a written investment policy statement can be a reliable reference.

• Document your investment policy before the market is stressed
• Include specific guidelines for actions during market extremes
• Review every year but make changes rarely to maintain consistency

Create your own Circuit Breakers

Predetermined pause points prevent reactive decisions during high-emotion periods:

• Prior to making major portfolio changes, there are waiting periods that must be observed.
• Asset Allocation Guardrails that Limit Maximum Adjustments
• Trusted advisors who provide perspective during emotional periods

Every market cycle can be a great learning opportunity

Market experiences can be turned into valuable lessons with a systematic review.

• After-action review identifies emotional patterns
• Focus on process, not just results
• Even small improvements add up over the lifetime of an investment

The Bottom Line: Your psychology is your edge

The greatest investment advantage is to manage your emotions. You can't always control the market, but you can manage your reaction to it. This is perhaps the most important investment skill.

What emotional investing pitfalls have you fallen for? How have you managed your emotional reactions to market volatility? Share your experiences with us in the comments.