Personal Finance

The investing mistakes you want to avoid as the market sinks — and what to do instead

Key Points
  • If a potential global economic slowdown and recent market volatility has you worried, you should proceed with caution with your own investments.
  • Market tumult can often lead investors to make moves based on their emotions, and those spur-of-the-moment decisions are often ones they later regret.
  • Behavioral finance expert Dan Ariely weighs in on what mistakes investors are most prone to at these times — and what you should do instead.
What the 'Predictably Irrational' author says not to do when the stock market tanks
What the 'Predictably Irrational' author says not to do when the stock market tanks

It's no secret that today's markets are uncertain.

Between recent triple-digit drops to the Dow Jones Industrial Average and renewed fears of a looming recession, this year's record run-up on stocks has been put on pause.

Whether that's just a blip or signs of a prolonged downturn is to be determined.

In times like these, investors are susceptible to getting swept up by their emotions.

Dan Ariely, chief behavioral economist at personal finance app Qapital and professor of behavioral economics at Duke University, said that there are ways to avoid getting caught up — and making investment moves you could regret later.

Henderson Bay, New Zealand
chameleonseye | iStock Editorial | Getty Images

Resist the urge to check your portfolio

Watching the stock market can be a roller coaster of emotions.

"What happens on the day that it goes up?" Ariely said. "You feel happy.

"On the day it goes down, you feel extra miserable."

But the best action to take in this market may sound counterintuitive: Don't look at your portfolio.

Ariely recalled how during the financial crisis, he found himself caught up in checking his accounts more frequently.

"I wasn't going to sell," he said. "I wasn't going to buy; I was just kind of looking obsessively."

One Friday morning, he noticed he was consumed with checking his investments. And that put him in a bad mood.

Dan Ariely, behavioral economist and psychologist.
Photo: Mary R.

To change that, he locked himself out of his accounts, and then enjoyed the weekend with his wife.

"If we're going to look at it going up and down, we're just going to be more miserable," Ariely said. "We're not only going to be more miserable, but act on it."

Those panicked decisions based on emotions often lead to regrets later, he said.

Of course, there are times when you have to log in. The key is to be intentional when you do.

"Decide what change you want to make, and only then open your portfolio," Ariely said. "It's never a good idea to open up your portfolio for fun and then decide what to do."

Use caution when making decisions about the future

The decisions you make about the stock market are always decisions about the future, Ariely said.

Inevitably, many investors decide how to invest based on what happened in the past.

"It's water under the bridge," Ariely said. "It's gone. It's over."

More from Personal Finance:
What a payroll tax cut would actually mean for your wallet
Here's why people aren't saving more in their 401(k) plans
Why that 30% credit card use rule of thumb could cost you

And when past performance clouds your decisions, it also adds and emotional burden to your approach.

Instead, Ariely suggests, try to starting with a clean piece of paper or spreadsheet. Imagine all your assets are in cash, and then decide how you would invest that money today.

"It's the right way to say, 'What do we want and let's implement it,' rather than seeing what we have already," Ariely said.

"That's the right way to invest."