By: Reed C. Fraasa, CFP®, AIF®, RLP®
Money decisions are rarely as rational as we would like to believe.
Over the years, I have watched intelligent, accomplished people struggle with financial decisions that seemed straightforward on paper. Physicians, engineers, and business owners can be disciplined in their professional lives and still find it difficult to separate feelings from decisions about their own savings. Financial knowledge helps, but it does not eliminate emotion.
My own experience is a case in point. I bought my first stock in my early 20’s through a sales broker and lost the entire investment. For years, I was skeptical of the market and of the people selling investments. When I heard someone describe the stock market as a “fool’s game,” I tended to agree. It took education and experience to recognize how much that early loss had shaped my thinking.
Your Brain Runs at Two Speeds
In Thinking, Fast and Slow, Nobel laureate Daniel Kahneman describes two modes of thinking. System 1 responds quickly and intuitively; System 2 is more deliberate and analytical. The distinction is useful in understanding why financial decisions can feel urgent even when there is time to consider them.
Consider how animals respond to danger. When one member of a herd bolts, others often follow before they have identified the threat. That instinct can be protective in the wild, but a similar impulse can work against investors.
A sharp market decline can create a powerful urge to do something, particularly when friends and headlines reinforce the sense that conditions are deteriorating. Selling may provide immediate emotional relief, but it can also leave an investor unsure when to return to the market.
The Cost of Feelings Is Measurable
DALBAR’s Quantitative Analysis of Investor Behavior has documented differences between the returns of equity investors and broad market benchmarks. In 2024, that gap was particularly wide.
In 2025, however, the gap for equity investors was very small, and the gap for bond investors was quite large. The contrast is a useful reminder that investor outcomes vary considerably from year to year, and that differences from a benchmark cannot be attributed entirely to investor behavior.
These comparisons are worth examining, although they should not be interpreted as a pure measure of emotional mistakes. Investor cash flows, investment selection, fees, and differences between a fund portfolio and its benchmark can all affect the result. Even so, the findings raise an important question: how much of an investor’s long-term outcome is influenced by decisions made during periods of uncertainty?
Think back to the period from late 2018 through early 2024. Investors encountered trade disputes, the pandemic, political uncertainty, war in Ukraine, rising inflation, and a rapid increase in interest rates. Each event offered a plausible reason to reconsider an investment strategy.
Yet investors who remained diversified and invested through those events participated in the subsequent market recoveries. The precise return depended on the investment, dates, and treatment of dividends.
The difficult part was often not understanding the plan, but remaining comfortable enough to follow it.
Feelings We Inherit
Our attitudes toward money are shaped long before we open our first investment account. Parents and grandparents pass along lessons about thrift, debt, security, and risk, often rooted in circumstances very different from our own. Families affected by the Great Depression, for example, sometimes developed a lasting preference for cash and a distrust of stocks.
My late partner, Paul, received a memorable piece of advice from his father near the end of his life: never sell AT&T stock. It was an expression of conviction and care, but it also shows how an investment can become tied to family history. As AT&T stock declined in value after the dot-com bubble, the advice deserved to be evaluated in light of Paul’s own circumstances rather than treated as a permanent rule; however, it never was.
An inherited investment may carry memories or a sense of obligation that makes an otherwise sensible decision to sell surprisingly difficult.
The Two Biases I See Most
Two patterns arise frequently in my conversations with new clients: loss aversion and the sunk-cost effect.
Loss aversion describes our tendency to feel the pain of losses more intensely than the pleasure of comparable gains. Kahneman and Amos Tversky developed the concept in prospect theory, and their later research used a model in which losses received substantially greater weight than gains. The often-cited figure of roughly 2.25 is a parameter from that model, not a fixed ratio that applies to everyone. Clients sometimes tell me they would feel much more secure if they could avoid the next bear market. When we explore what that would require, the challenge becomes clear: an investor would need to know not only when to get out, but also when to get back in.
Doing both consistently is extraordinarily difficult.
The sunk-cost effect is different. Someone may continue holding an investment or paying for a product because so much time or money has already gone into it. The more useful question is whether that commitment still makes sense today. That can be hard to ask when changing course feels like admitting a mistake.
I recognize both tendencies in clients, and at times in myself. Awareness does not make us immune, but it can help us make more deliberate choices.
What You Can Do
Before making a major financial change, identify what is prompting it. Are you responding to new facts, a change in your circumstances, or anxiety about recent headlines? Sometimes giving yourself a little time to reflect can make the distinction clearer.
It is also worth asking where your beliefs about money originated. Advice that was sensible for a parent or grandparent may not fit your situation today.
Finally, consider the decision in light of what the money is intended to accomplish. The purpose of a plan is to provide a framework for choices, especially when short-term events compete for attention.
An objective advisor can help with that process. In 2021, the CFP Board added Psychology of Financial Planning as a principal knowledge topic, with the updated examination content taking effect in 2022. Vanguard’s Advisor’s Alpha framework has also described the potential value of advice, including behavioral coaching. It’s often-cited estimate of approximately 3% is a modeled potential benefit across several advisory practices, not a guaranteed annual increase in returns.
The next market decline will bring another round of unsettling headlines. Before changing your investments in response, revisit the reasons behind your plan and discuss what, if anything, has actually changed.
Reed C. Fraasa is a CERTIFIED FINANCIAL PLANNER™ and founder of HIGHLAND Financial Advisors, a Fee-Only financial planning firm that offers comprehensive financial planning, retirement planning, and investment management. Reed has 30 years of experience as a fiduciary advisor and is the author of The Person is the Plan®, a unique financial planning process. Reed was a frequent guest contributor on PBS Nightly Business Report and has been featured in the New York Times, Wall Street Journal, and Star Ledger newspapers.
The foregoing content reflects the opinions of Highland Financial Advisors, LLC, and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct.
Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses, which would reduce returns.
Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful or that markets will act as they have in the past.
The above article was written with the assistance of artificial intelligence (AI).