The Psychology of Investing: How to Stay the Course

A reasonable investment plan can still fail if the investor cannot follow it.

Market declines create fear. Strong recent returns create confidence. Financial news creates pressure to act. When those emotions take over, investors may abandon a diversified portfolio, chase recent winners or repeatedly change strategies.

The psychology of investing matters because long-term results depend on both the portfolio you choose and the decisions you make while holding it.

Staying the course does not mean ignoring every change or refusing to sell. It means following a plan based on your goals instead of reacting impulsively to markets.

Common investing biases at a glance

Behavioural tendency	How it may appear	A useful response
Loss aversion	A decline feels more urgent than an equivalent gain feels rewarding	Choose a level of risk you can realistically maintain
Recency bias	Recent returns seem likely to continue	Review longer periods and return to your original plan
Overconfidence	You believe you can consistently identify the next winner or market turn	Limit speculative decisions and diversify
Action bias	Doing something feels safer than waiting	Require a clear reason before changing the portfolio
Herding	Other investors’ enthusiasm makes an investment appear safer	Evaluate the investment independently
Confirmation bias	You seek information that supports a decision already made	Look deliberately for evidence that could prove you wrong

Recognizing a bias does not make it disappear. The more reliable approach is to design a process that reduces the number of emotional decisions you must make.

Why losses can feel so powerful

A market decline is not experienced as a neutral number on a screen. It can feel like a threat to retirement, financial independence or another important goal.

Daniel Kahneman and Amos Tversky’s foundational research on prospect theory found that people generally respond more strongly to losses than to equivalent gains. This tendency became known as loss aversion.

You may have heard that a loss hurts exactly twice as much as an equivalent gain feels good. That is a useful illustration, but it should not be treated as a universal rule. The strength of loss aversion varies by person, situation and method of measurement.

The practical lesson is simpler: when a portfolio falls, the desire to stop the discomfort can become stronger than the desire to follow a long-term plan.

This can lead an investor to sell after a decline, even though the investment was originally selected for a goal decades away.

Frequent checking can make long-term investing feel short-term

Stocks can produce substantial gains and losses over short periods. The more frequently you look at your portfolio, the more often you will see a loss.

Researchers Shlomo Benartzi and Richard Thaler described the combination of loss aversion and frequent evaluation as myopic loss aversion. Someone investing for 20 years may still experience the portfolio as a series of daily wins and losses if they check it constantly.

That mismatch creates a problem:

• The investment goal is long term.
• The information arrives continuously.
• The emotional reaction is immediate.

Checking an account is not inherently harmful. It becomes a problem when every short-term movement feels like new information that requires a decision.

For a diversified long-term portfolio, reviewing it on a planned schedule may provide enough information without turning daily volatility into a daily test of discipline.

Why taking action feels reassuring

During uncertainty, taking action can create a sense of control.

An investor may sell, switch funds or hold cash because waiting feels passive. However, an action can reduce anxiety without improving the financial outcome.

Research by Brad Barber and Terrance Odean examined more than 66,000 brokerage households. Their study, Trading Is Hazardous to Your Wealth, found that the households that traded most frequently earned lower net returns than less-active households during the period studied.

The research does not mean every trade is a mistake. Investors may need to trade to:

• Rebalance a portfolio
• Use money for a planned goal
• Change an unsuitable investment
• Simplify overlapping holdings
• Adjust to a meaningful change in circumstances

The danger lies in trading without a reason connected to the financial plan.

Before acting, ask:

What changed: my goal, my circumstances, my investment—or only its recent price?

That question creates a useful pause between feeling something and doing something.

Recency bias makes the recent past look permanent

People naturally give significant weight to recent and memorable events.

After strong market returns, risk can appear smaller than it really is. Investors may increase their stock allocation, buy a popular sector or assume recent winners will continue to lead.

After a decline, the opposite happens. Risk appears overwhelming, and holding cash can feel safer even when the long-term plan has not changed.

This is recency bias: treating recent experience as if it were a reliable forecast.

Vanguard’s historical analysis of the S&P 500 found that many of the strongest and weakest trading days occurred close together. This pattern helps explain why leaving the market and choosing the right time to return are both difficult.

Historical patterns cannot guarantee future returns. They do show why a market-timing decision requires two successful choices:

1. When to leave
2. When to return

Being right only once is not enough.

Overconfidence can turn investing into prediction

Overconfidence is not limited to inexperienced investors. Learning more about investing can sometimes increase the temptation to forecast interest rates, identify the next winning sector or improve a portfolio that already works.

The problem is that confidence and forecasting skill are not the same thing.

Overconfidence may appear as:

• Concentrating heavily in a few familiar companies
• Trading after reading market news
• Replacing funds based on short performance periods
• Believing a past successful trade proves repeatable skill
• Making frequent changes without measuring their total cost

This does not mean investors must avoid every individual stock or active decision. It means those decisions should have clear limits and should not threaten the core financial plan.

If you enjoy selecting investments, one option is to keep a small, predefined portion of the portfolio for those decisions while maintaining a diversified core. The appropriate amount may also be zero.

Your investing environment influences your behaviour

Investment decisions do not occur in isolation. Apps, notifications, performance rankings and lists of popular investments can direct attention toward trading.

Research commissioned by the Ontario Securities Commission found that certain digital engagement practices can affect investor behaviour. Its study of gamification and retail investing found that even rewards with little economic value could increase trading frequency in a simulated environment.

This does not mean investment apps are inherently harmful. They can reduce costs and make diversified investing more accessible. However, features designed to encourage engagement may conflict with a strategy that requires patience.

You can change the environment by:

• Disabling price and market-news notifications
• Removing investment widgets from your phone
• Avoiding lists of the day’s most actively traded securities
• Checking your portfolio on a predetermined schedule
• Keeping your financial plan somewhere more visible than market news

Good investing behaviour becomes easier when the environment does not continuously invite intervention.

What staying the course actually means

Staying the course means continuing to follow a suitable investment process through normal market uncertainty.

It does not mean keeping an unsuitable portfolio forever.

A change may be justified when:

• Your goal has changed
• Your investment horizon has shortened
• Your income, debt or emergency savings have changed materially
• Your ability or willingness to accept risk has changed
• Your portfolio no longer matches its target allocation
• An investment no longer serves its intended purpose
• Tax rules or account rules affect the plan
• Fees, complexity or overlapping holdings need to be corrected

A falling market, a frightening prediction or another investor’s success is not automatically a reason to change.

The distinction is between responding to your life and reacting to market noise.

Seven ways to build an investment plan you can follow

1. Choose a realistic level of risk

A portfolio should reflect more than the return you hope to earn. It must also reflect your financial ability and emotional willingness to tolerate losses.

An aggressive portfolio may look attractive during a strong market. Its real test arrives when its value falls.

If a normal decline would cause you to sell, lose sleep or abandon the plan, the portfolio may contain more risk than you can maintain. A more balanced allocation that you can hold may produce a better personal outcome than an aggressive allocation you repeatedly interrupt.

The article How to Calculate Your True Investment Risk explains the difference between risk tolerance, risk capacity and the risk required to reach a goal.

2. Write down the purpose of the portfolio

A portfolio without a defined purpose is easy to compare with anything performing better.

Record:

• What the money is for
• When you expect to use it
• Your target mix of stocks, bonds and cash
• How much you intend to contribute
• When you will review the plan
• What circumstances would justify changing it

A written plan gives you something more stable than your current emotions against which to evaluate a decision.

3. Automate contributions

Automatic contributions reduce the need to decide repeatedly whether it is a good time to invest.

They also shift attention from short-term prices toward a behaviour you can control: saving consistently.

Automation does not guarantee a profit or protect against losses. Its benefit is behavioural. It makes following the plan the default action.

4. Use a simple portfolio

Every additional account, fund or strategy creates another decision.

For some investors, a diversified all-in-one ETF or another automatically rebalanced portfolio can reduce the temptation to select sectors, compare overlapping funds or decide what to buy each month.

The product still needs to match your risk profile and timeline. Simplicity cannot make an unsuitable asset allocation suitable.

If you are considering this approach, see All-in-One ETFs in Canada: How to Choose the Right Portfolio.

5. Create a rebalancing rule

Rebalancing restores the portfolio to its intended asset mix. It should follow a rule rather than a prediction.

For example, you might review the allocation once or twice a year, or when an asset class moves outside a predetermined range. New contributions can sometimes help restore the target without requiring a sale.

The exact method matters less than deciding in advance how the process will work.

6. Add friction before major changes

Create a waiting period before making an unplanned investment change.

During that period, write down:

• The proposed change
• The reason for it
• The evidence supporting it
• The possible tax and transaction costs
• What would cause you to reverse the decision
• Whether you would make the same change if markets had been calm

A pause cannot guarantee the correct decision, but it gives the emotional response time to weaken.

7. Review the plan on a schedule

A long-term portfolio does not require constant attention, but it should not be ignored indefinitely.

A scheduled review can include:

• Progress toward the goal
• Changes in your timeline
• Current asset allocation
• Contribution levels
• Fees
• Account beneficiaries
• Tax considerations
• Whether the portfolio remains emotionally sustainable

This separates useful maintenance from reactive monitoring.

What to do during a market decline

A written checklist can help when markets become stressful.

Step 1: Check whether you need the money soon

Money required in the near future may not belong in volatile investments. If an upcoming purchase or withdrawal was not reflected in the portfolio, the issue may be the original asset allocation rather than the market decline itself.

Step 2: Revisit the purpose and timeline

A lower market price does not automatically change a long-term goal. Confirm whether the reason for investing remains intact.

Step 3: Compare the portfolio with its target

If the allocation remains close to its target, no action may be required. If it has moved outside your rebalancing limits, follow the rule established in your plan.

Step 4: Protect your short-term finances

An emergency fund can reduce the risk that an unexpected expense forces you to sell investments during a decline.

Step 5: Reduce unnecessary information

More commentary does not necessarily produce a better decision. During volatile periods, consider limiting how often you check prices and consume market predictions.

Step 6: Seek help if the plan no longer feels manageable

Persistent anxiety may indicate that the portfolio is too risky, the goal is unclear or the plan needs professional review. The solution is not always to tolerate more discomfort.

Registered accounts do not remove investment risk

A TFSA or RRSP changes how an investment is taxed. It does not determine how risky the investment is.

Both accounts may hold cash, GICs, bonds, mutual funds, ETFs and individual securities, subject to the applicable rules. A TFSA containing speculative stocks may be far riskier than an RRSP containing a balanced portfolio.

The accounts can still influence behaviour:

• The flexibility of a TFSA may make withdrawals easier.
• The tax consequences of an RRSP withdrawal may discourage using it for short-term spending.
• Seeing separate accounts may cause investors to treat each one as a different portfolio, even when they serve the same goal.

Account choice matters, but the investment allocation and your behaviour inside the account matter too.

For the account-level differences, see TFSA vs. RRSP: Which Account Should You Choose?.

Simplicity is a behavioural advantage

A simple portfolio is easier to understand, monitor and maintain. That makes it easier to distinguish a necessary adjustment from the desire to tinker.

The goal is not to avoid thinking about investments. It is to concentrate your decisions where they can meaningfully improve the plan.

Explore the psychology behind investing decisions

Investor behaviour appears in many forms. It can lead us to complicate a portfolio, search endlessly for a better strategy, react to recent market movements or make changes simply to feel more in control.

These guides explore those situations in greater detail:

• Less Is More: Why Simplicity Works in Investing explains how fewer choices can make a portfolio easier to understand and maintain.
• The Search for the Perfect Portfolio examines why constant optimization can make a sound investment plan harder to follow.
• When Investing Becomes Too Much looks at what can happen when monitoring and adjusting a portfolio becomes a habit.
• Why Time in the Market Beats Timing the Market explains why reacting to forecasts and market movements can undermine a long-term plan.
• How to Find Your Investment Risk Profile in Canada helps connect risk, time horizon, financial capacity and emotional comfort.
• How Your Money Mindset Affects More Than Money explores the broader beliefs and experiences that influence financial decisions.

Frequently asked questions

Why do investors panic during market declines?

Losses can feel more significant than equivalent gains, while uncertainty makes action appear reassuring. Frequent account checking and alarming headlines can intensify that reaction.

How can I stop checking my portfolio constantly?

Choose a review schedule, disable investment notifications and remove shortcuts that make checking automatic. Keep the date of your next planned review in your financial plan.

Is it ever appropriate to sell during a downturn?

Yes. Selling may be appropriate when you need the money, your goal or timeline has changed, the portfolio was unsuitable, or a planned rebalancing requires it. The important question is whether the decision comes from your financial plan or a short-term emotional reaction.

Does passive investing eliminate emotional decisions?

No. A passive fund can reduce decisions about security selection, but the investor must still choose an allocation, contribute, rebalance and remain invested. A passive strategy only works when the investor can follow it.

How do I know whether my portfolio is too aggressive?

Warning signs can include persistent anxiety, repeated selling during declines, difficulty sleeping, or an inability to accept the possible short-term loss. Your financial timeline and ability to absorb losses also matter.

Should I buy more whenever markets fall?

Not automatically. Continuing regular contributions or rebalancing may be appropriate when the portfolio remains suitable. However, emergency savings, debt, upcoming expenses and your target allocation should be considered before contributing additional money.

The bottom line

Investment success depends on more than finding a good portfolio. It also requires a process that remains workable when markets become uncomfortable.

Loss aversion, recency bias and overconfidence are normal human tendencies. Relying on willpower alone is therefore fragile.

A realistic asset allocation, written plan, automatic contributions, simple portfolio and scheduled review process can reduce the number of decisions made under stress.

The best portfolio is not the one that looks most impressive during a calm market. It is one that supports your goals and that you can continue to hold when staying invested becomes difficult.

This article provides general information and does not constitute financial, legal or tax advice. Investing involves risk, including the possible loss of principal. Past performance does not guarantee future results.