Market volatility is inevitable. Letting your emotions drive investment decisions doesn’t have to be.
Investing isn’t just about numbers—it’s about nerve. During periods of market turmoil, even the most seasoned investors can fall prey to their own instincts. Charts, models, and forecasts may guide strategy, but it’s human psychology that often steers the wheel in critical moments. That’s why understanding—and managing—behavioural and emotional biases is just as important as reading balance sheets.
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These biases can quietly undermine decision-making. But recognising them is the first step toward building a resilient, long-term portfolio.
Anchoring bias
Anchoring happens when an investor fixates on a specific reference point—like a historical high or target price—regardless of changing conditions. In such cases, the investor holds on to an asset simply because it once had a high value, even though current market conditions have changed.
For example, some investors have clung to themes such as defence and railway PSUs over the past year, influenced by previous price rallies. To counter this, it’s best to focus on broad-based, diversified strategies that aren’t dependent on a single storyline.
Confirmation bias
This kicks in when investors selectively seek out information that affirms their pre-existing views while discounting evidence to the contrary.
An investor with a strong political or economic perspective might only trust data that reinforces it, warping investment choices. The fix? Actively seek diverse viewpoints from advisors and fund managers, and rely on data-backed, objective research.
Recency bias
Recency bias leads to overvaluing short-term events, often at the expense of long-term goals.
Consider this: recent market swings have prompted some investors to reduce equity exposure, fearing immediate losses. But with India’s structural growth story intact, staying invested—and building positions gradually—can turn current volatility into an opportunity.
Loss aversion
This emotional bias causes investors to fear losses more than they value gains. The result? Holding onto poor performers in the hope they’ll bounce back.
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A better approach is to focus on long-term goals, diversify across asset classes, and maintain a separate fund for short-term needs—helping reduce the pressure to make emotionally charged decisions.
Status quo bias
Many investors prefer not to touch their portfolios—even when the market changes drastically. This resistance to change can mean missing out on opportunities or enduring avoidable risks. Periodic portfolio reviews with a trusted advisor can help ensure that capital is reallocated away from lagging investments and toward better-performing options.
Herding bias
This bias drives people to follow the crowd, assuming widespread behaviour equals good judgment. It’s especially common in speculative markets, like startup investing. To avoid being swept up in market fads, investors should stick to a disciplined, independent strategy grounded in their personal risk profile—not the latest trend.
What investors should do
To navigate market fluctuations successfully, investors need a mix of strategic discipline and psychological awareness. Regular portfolio reviews are essential to ensure investments remain aligned with long-term goals and risk appetite.
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Diversification is a powerful tool. A well-diversified portfolio can cushion the impact of emotional missteps. By spreading investments across low-correlated assets, investors reduce the damage of any single poor decision. It’s during volatile times that behavioural biases are most likely to strike—and when having a diversified strategy pays off the most.
Ankur Punj is managing director & national sales head at Equirus Wealth.
