The stock market can bring out strong emotions, and today’s environment is a reminder of how those emotions can lead to risky decisions. Whether prices are rising or falling, it’s easy for investors to make moves they later regret, often because they are focused on the short term rather than their long-term goals.

When markets are going up, confidence tends to grow. Many investors chase after trendy companies without taking the time to look at the fundamentals. These companies might seem like winners, but their success is often based on excitement rather than financial strength. On the other hand, when markets drop, fear takes over. Some investors sell off their stocks entirely, worried about further losses, while others gamble on beaten-down stocks, hoping for a quick recovery. Both reactions are driven by emotions instead of rational thinking.

One common bias behind these behaviors is recency bias. This happens when people assume that what is happening now will continue. For example, if a stock is climbing, it’s tempting to believe it will keep going up. When the market drops, the same bias can lead to overreaction, causing investors to make rash decisions instead of sticking to their plans.

Another factor adding risk today is the concentration of the S&P 500. Right now, seven stocks make up a large portion of the index, reaching a level not seen in nearly 100 years. For investors who rely on index funds or growth-focused mutual funds and ETFs, this creates additional risk as some growth funds carry twice the concentration risk of the broader market. If just a few of these companies stall or decline the impact could dramatically impact your portfolio.

Herd mentality also plays a role. When everyone seems to be buying or selling, it can feel natural to follow the crowd. But decisions made out of fear or excitement rarely turn out to be the smartest ones.

The solution is to focus on the fundamentals. Rational investing isn’t about chasing trends or trying to predict the market. It’s about finding companies with strong financials, skilled management, and a history of delivering long-term value.

The stock market will always have ups and downs, but staying disciplined can help you avoid emotional traps. By focusing on high-quality businesses and long-term strategies, you can navigate uncertainty.

About Beese Fulmer Private Wealth Management
Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms. The company serves high-net-worth individuals, families, and non-profits and has been ranked as one of the largest money managers in Northeast Ohio.