Company shares and exchange traded funds (ETFs) go up and down all the time. And when clusters of companies navigate unusual global economic conditions, whole share markets can also be volatile, experiencing bigger rises or falls than usual. Global events can include anything from tariffs and trade wars, US presidential elections to 2024's 'Manic Monday', as well as global pandemics, supply chain issues, and even ships getting stuck in canals. 

Investors can avoid making emotional investing by learning how to react to stock market shifts. Just as you factor in variations in cost for your household budget, companies are well-prepared to adapt to changes in economic conditions. They probably expect to experience periods of growth as well as occasional times of decline. And just like the price of eggs, their share value is likely already priced in to reflect those up and down shifts over time. 

'Emotional investing—allowing fear, anxiety, or excitement to dictate investment decisions—can significantly impact your financial future. Emotional investing is one of the biggest risks to long-term financial success, as it leads to inconsistent decision-making and suboptimal results.' — Ted Toal, Financial Planning

So, why's it important that people who are investing for the long term avoid emotional investing?

It’s normal for markets to move up and down

If you look at how much the share market can move over one day, one week, one year and over 10+ years, you'll see the longer the length of time you zoom out, the smoother the picture looks. Since 1990, the US share markets have dropped in value by 10% or more on a dozen occasions — the worst being between 2007-2009, during the global financial crisis, when markets plummeted by more than 50%.

The share markets trending in either direction — expanding or contracting — are called bull markets or bear markets. This is when markets grow or drop more than up to 20%. It’s useful to know that the average length of a bear market — aka a share market dip — has historically been around 9 months, and has happened on average around three times a decade. The average duration of a bull market has historically been just over 2.5 years.

It’s natural to respond emotionally to market shifts

When faced with a portfolio that's dropping in value and sitting in the red, you may grapple with an instinct to sell your shares. This feeling is a natural part of the cycle of investor emotions.

'You can't stop the wave, but you can learn to surf.' — Russell Investments

But you don't have to react. If you panic and start reactive investing and selling off your investments, when the markets go back up again and the companies and ETFs return to growth, you may miss out on investing benefits, like dividend payouts and the long term effects of compounding growth — called the 'eighth wonder of the world'.

So instead, pause, take a breath and consider doing (and not doing) a few of these things when the waters get choppy and the tide goes out.

7 steps to avoid emotional investing

1. Use long term investment strategies

When you're a long term investor, it's likely at some stage that the share markets will dip. History shows us that when investors are prepared to ride the ups and downs of the share markets (those bull and bear markets), they are more likely to come out on top over the long term.

'Research indicates that emotional investors underperform the market by approximately 1% annually due to reactionary decisions driven by recent market movements. These decisions often stray from a disciplined investment strategy, leading to avoidable losses. While this may seem minor in a single year, the compounding effect over time can significantly hinder financial progress and set investors back from achieving their long-term goals.' — Surmount

The opposite of panic is deciding on your investing strategy and sticking with it. This means knowing thyself! That is, knowing what you want to achieve with your investing, your risk tolerance, and your plan for when share prices drop and your heart rate rises.

Investors who held a balanced share portfolio for the past 30 years may have experiences a cumulative rise on average of up to 750%.

2. Avoid panic selling

If the property market drops and your house value falls, is your first instinct to sell it? Probably not. Nothing about your house has changed; it's the same windows, doors, walls, footprint and neighbourhood. So unless you need to sell it in a hurry, you’ll probably hold on and wait for prices to rise again before selling it — because that makes sense.

So think of the share markets as you would the property market, and don't panic, wait it out.

It's a lot like owning shares in a company. Whatever the share value, it’s the same company, with the same products and services, same people and same capacity for innovation and growth. Unless you think something has fundamentally changed in a company or ETF that could affect the long term performance, a fluctuation in their share market value could simply be part of the usual up and down market cycles.

'The reality is that the investor's psyche can overpower rational thinking during times of stress, whether that stress is a result of euphoria or panic. Taking a rational and realistic approach to investing—during what seems like a short time frame for capitalising on euphoria or fearful market developments—is essential.' — Kristina Zucchi, Investopedia

If your investing plan is to hold onto your shares for 5-10 years, then you've probably given yourself plenty of time to wait out the dip and for the shares to rise in value again (remember, even bear markets have typically lasted just nine months). ‍

If you've sold your shares, and the market grows again, you won’t experience the growth, but you may remember the loss for quite some time. So, don’t panic.

3. Set clear investing goals

Studies show investors who align their investments with their long-term goals tend show more patience and resilience during market fluctuations. A 2024 study found that investors who had long-term investment strategies could stay focused on their objectives, rather than reacting impulsively to short-term market changes.

Being clear about your investing purpose can help you stay the course. Is it to boost your retirement? To help build a house deposit, or get mortgage-free sooner? Identify the companies and ETFs that you're committed to long term as ‘holds’, and have a timeframe in mind for when you plan to reevaluate your investments (and stick to that timeframe!). Think years, not months.

'Long-term investments are assets that you hold for years—sometimes decades. Unlike short-term trades, these investments focus on sustained growth and compound returns over time. Patience is key, and those who stay the course often see exponential growth in their wealth.' — Forex GDP

Being a long term investor can help you keep a clear head on the risks you’re prepared for, and can keep your investing decisions rational instead of emotional.

4. Should you consider buying the dip?

Share markets change daily and drop and rise in value many times in a year creating 'dips' along the way. Every 3.5 years or so, these market dips may be even more substantial. It's all part of the global economic cycles over time. Unless a drop in share price goes hand in hand with a change in the quality of an investment — such as something that negatively impacts a company’s ability to operate and grow in the longer term — then you may want to think of a share price drop as your investment ‘going on sale’.

Many experienced investors celebrate the dips in a quality share’s value. Investing GOAT Warren Buffett told investors in his 2009 shareholder’s letter: 

'Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.' — Buffett

Just as Kiwis can't resist a Briscoes or Black Friday sale, many investors like to buy shares in companies and ETFs when they're cheaper. But always do your research, and take a leaf from Plancorp chief investment officer Peter Lazaroff's playbook, and 'be smart with what you choose to buy'.

5. Try to diversify

Creating a portfolio diversity pie may help lower investment risk. Share markets offer lots of investment types — like company stocks, ETFs, gold, Bitcoin ETFs and REITs. Think about what percentage of your portfolio you may want of each. This is diversification, an investment strategy that can lower risk and exposure to market drops.

'US markets are adjusting to changes in policy and tech leadership, while the entire world is adapting to “Trump 2.0.” The question for many investors might be: Are the recent market drawdowns a buying opportunity? We believe the answer is yes, but not in the leading investments of the recent bull run, such as passive indexes that benefited from the rapid growth of US tech stocks. Stock picking is key.' — Lisa Shalett, Chief Investment Officer, Wealth Management, Morgan Stanley

Diversification is spreading your money across a range of investments and industries, which may include companies you believe in as well as ETFs like index funds that track the performance of a range of companies on a share market, such as the top 500 performing companies in the US on the S&P 500. Or dividend-paying Blue Chip companies or ETFs that also pay dividends. Or choosing ETFs across a range of sectors, like finance, or themes, such as clean energy, or gender diversity. 

Building a resilient, diversified portfolio can help you navigate market fluctuations with confidence.

6. Become a 'lazy investor'

You could even try investing smaller amounts at regular intervals over time and embrace being a 'lazy investor'. Investing strategies like auto-invest can be a useful tool to invest a regular amount every pay day and set (and forget) by selecting the same shares every time.

'Lazy investors’ superpower is their ability to ride out the market’s ups and downs en route to long term investment success.' — Simon Turner, Investment Markets

Auto-investing can helps you avoid emotional investing mistakes, and your decisions aren’t based on feelings, impatience, or having to constantly watch the markets.

Plus you'll benefit from dollar-cost averaging, by buying shares at different values over time. 

7. Avoid timing the market

Time in the market vs timing the market can make for calmer investing. Timing the market is trying to buy shares at a time when you think they're low value, and selling them (usually quickly) when you think they've neared their peak. While it’s an investment strategy used by investment firms and speculators, many financial professionals and academics believe timing the market is ‘impossible’ — and it may even be hazardous to your wealth.

'Investing at regular intervals is an effective and potentially less stressful approach to building wealth over the long run and during any type of market.' — RBC Global Asset Management

Most retail investors don't have access to a breadth of industry experience and sophisticated financial tools. So trying to accurately anticipate the future movements of stocks or the share markets — aka timing the market — may be risky.

If you’re investing for the long term, timing the market is probably a strategy best left to the experts.

Instead of timing the market, think time in the market.

Just like the certainty of death and taxes, you can probably be certain of cyclical market volatility from time to time. But always know that you are in charge of how emotions affect investment decisions, and whether you choose to react to changes in market conditions is up to you. 

As famous investor Benjamin Graham said, 'The individual investor should act consistently as an investor and not as a speculator'. So, keep calm and ride the tide! 🏄