The Psychology of Market Peaks and Troughs

When your investments fall, do you feel your stomach drop? Or that rush of excitement when they soar? You're not the only person who feels this way. Those powerful emotions can hijack even the best investment plans.

Let's discuss why your brain behaves in this manner and, more importantly, what you can do to maintain your calmness when the markets become crazy. - Learn more about Affirm Wealth Advisors

Why Your brain can sabotage Your investments

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

Hidden forces driving your financial decisions

Do you think that your financial decisions are rational? You may be mistaken. Most financial choices happen in your 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 what was said about money at home when you were a child? These early experiences left financial imprints on you that continue to influence your reactions to market fluctuations today.

• Early money experiences are linked to neural pathways that can last for decades
• The effects of living through market crashes on our minds
• Risk tolerance is influenced more by your personal financial history than any other finance class

Why knowing better doesn't mean doing better

This is the sad truth: Knowing what to spend your money on doesn't ensure you'll do it. This is why even the most seasoned financial advisors make irrational decisions when they are feeling emotional.

• In seconds, the market can be dominated by panic.
• Investors are more likely to lose money if they do not have the correct knowledge.
• Information alone rarely changes deep-seated financial behaviors

Behavioral Finance - The Science Behind Market Madness

In traditional economics, we were assumed to be rational investors. Behavioral finance shows how emotions drive market moves.

From Rational Theory To Emotional Reality

Researchers began to study the field when they noticed patterns of irrational behavior in financial markets.

• Classical economists cannot explain why markets always 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 Can't Be Always Rational

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

• Assets can be mispriced by emotional reactions
• Investor herding causes boom-bust cycles that go beyond fundamental values
• The psychological reasons behind bubbles and market crashes

Key Principles Every Investor Should Know

When emotions cloud your judgement, you can recognize them by understanding these concepts.

• Loss aversion: Losses hurt about twice as much as equivalent gains feel good
• Recency bias: Giving too much weight to whatever happened most recently
• Anchoring Effect: Ties decisions to arbitrary points of reference rather than fundamentals

The emotional investing traps we all fall into

The built-in shortcuts in your brain helped our ancestors live longer, but they could ruin the returns on your investments. Let's uncover these biases, so that you can overcome.

Fear-Based Mistakes That Cost You Money

Fear is the emotion that drives more expensive investing mistakes than any other emotion.

• Loss aversion makes you sell winners too early and hold losers too long
• The risk-averse attitude increases when the opportunities are at their greatest
• Inflation slowly erodes cash positions when you catastrophize.

When Greed is at the Wheel

Optimism bias leads you to excessively risk in bull markets.

• Overconfidence is a sign that you are overconfident and underestimating your capabilities.
• FOMO (fear to miss out) makes you pursue hot sectors.
• Selective memory helps you forget past mistakes during market euphoria

Cognitive Blindspots that Every Investor has

Your brain is constantly looking for information that will confirm your beliefs.

• 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"

The Four Market Cycles, and Their Emotional Rolling Coaster

Psychological cycles are just as predictable in the market as price patterns. Understanding the current emotional stage of the market gives you an advantage.

Bull Market Psychology: A dangerous path to Euphoria

Bull markets have a predictable emotional progress:

• Early optimism opens up solid opportunities for reasonable pricing
• 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 trigger predictable emotional responses

• Investors continue to invest despite market decline, despite denial
• Fear triggers widespread selling as losses accelerate
• Capitulation creates the greatest opportunities amid maximum pessimism

The psychology of market turn-points

Investor psychology plays a major role in the market's transition, before it affects prices.

• Excessive optimism often signals market tops before prices actually peak
• Widespread capitulation usually precedes the bottom of the market
• Sentiment indicators often lead price movements by weeks or months

Practical Strategies to Manage Your Emotions in Market Chaos

It's possible to master the art of managing your emotional reactions to market swings. These techniques will help you stay rational in turbulent markets.

Mindfulness Practices That Improve Investment Decisions

Being aware of emotional reactions allows you to make more rational decisions.

• Regular meditation improves emotional regulation during market stress
• Body scanning can identify anxiety that is affecting decisions
• Reaction intensity is reduced by emotional labeling ("I am feeling afraid right now")

Why Investment Journaling will Transform your Results

This simple practice improves decision-quality dramatically:

• Your investment journal is a record of your thoughts and ideas.
• Tracking emotions alongside decisions reveals harmful patterns
• Regular reflection helps you become aware of your financial triggers

The Power of Psychological Distance

By viewing market volatility in a detached manner, you can reduce emotional reactivity.

• Imagine that you are giving advice to your friend, not yourself
• Use third-person language when considering decisions ("What should Jane do?")
• Visualize your future-self to put long-term outcomes above short-term emotional responses

Building an investment strategy to work with your Psychology

Your psychological tendencies are important to your investment strategy. Aligning the approach to your emotional realities can improve long-term results.

Rules-Based Investment: Your Emotional Breaker

The emotional aspect of investing can be avoided by establishing clear rules for investment in advance.

• 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

You can stay invested in the market even when it is turbulent with the right position size.

• Positions too small to cause panic in the event of a downturn
• Diversification reduces emotional investment attachment
• 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:

• Longer time horizons reduce emotional reactivity to short-term volatility
• Stability is improved by using different strategies to achieve various goals
• Mental preparation for expected volatility reduces surprise reactions

Social Psychology in Market Psychology

Prices are driven by the collective psychology of markets. Understanding these dynamics helps you resist unhealthy social pressures.

Why we cannot help but follow the herd

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

• Investors attracted by social proof are more likely to invest in popular stocks near the market's top.
• Herding explains why markets overshoot in both directions
• When herding behavior is extreme, there are many opportunities for contrarian thinking

Media narratives and market movements

Financial media amplifies emotions by presenting compelling stories

• News coverage follows market movements rather than leading them
• Media narratives simplify complicated dynamics into dramatic storylines
• Headlines affect your emotions more during periods of market stress

Thinking Independently When Everyone Agrees

Independent thinking has many benefits:

• Cultivate a diverse information diet to reduce narrative capture
• Seek disconfirming evidence to strengthen investment theses
• The best results are achieved when you think contrary to the market.

Create a better relationship with your money

The relationship you have with money can influence the way you invest. Clarifying your financial philosophy will improve decision-making during market swings.

Redefining Wealth in Your Own Terms

Wealth is different for different people.

• The freedom to spend money on what you want is more rewarding than accumulating.
• Know your "enough" to reduce comparison
• Absolute wealth may not be as important as control over your time

Aligning Your Money with Your Values

Investment decisions reflect your deeper values:

• Value-aligned investments can reduce cognitive dissonance and volatility
• Personal purpose brings stability to markets when they become turbulent
• Ethical considerations create deeper commitment to long-term strategies

Find Your Balance Today and Tomorrow

Money can be used for both immediate needs and long-term goals.

• The over-saving of money could lead to unnecessary present sacrifice
• Insufficient savings can lead to future anxiety, reducing today's enjoyment
• Individual circumstances and values will determine your personal balance point

Your Action Plan for Creating an Emotional Control System

Implementing theory makes it valuable. Create a personalized emotional management approach.

Create your Investor Policy statement

Written investment policies provide a reference point that is stable during times of market turmoil.

• Document your investment strategy before the market becomes stressed
• Include specific guidelines for actions during market extremes
• Review and modify your plan annually 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 advisers who offer perspective during emotional periods

Turn every cycle of the market into an opportunity to learn

Market experience is transformed into valuable knowledge through systematic review.

• After-action reviews reveal emotional patterns
• Don't just focus on results, but also your process
• The investment lifetime for small improvements is long.

The Bottom Line: Your psychology is your edge

Your biggest investment advantage is the ability to manage your feelings during market fluctuations. While you can't control the markets, you can control your response to them--and that might be the most valuable investment skill of all.

What emotional investing traps are you prone to? How have managed to control your emotions when the market is volatile? Please share your experience with us!