When feelings start influencing investment decisions

An investment falls sharply over a few days. Nothing about your long-term objective has changed, but watching the value fall creates a strong urge to sell. In a different market, an investment rises quickly and suddenly feels difficult to ignore because other investors appear to be making money from it.

Both situations can create emotional pressure to act. The emotion itself is not unusual. Investing involves uncertainty and real money, so fear, excitement, disappointment and regret can all form part of the experience.

Emotional investing becomes a concern when those feelings begin to drive investment decisions more strongly than the reasons for making the investment in the first place. The Financial Conduct Authority (FCA) has found that investment decisions can be influenced by emotional and social factors, including gut instinct and perceptions of other people’s investment success.

Understanding emotional investing is therefore not about trying to remove emotion altogether. It is about recognising when a feeling is beginning to become the reason for buying, selling or changing an investment.

What is emotional investing?

Emotional investing describes investment decisions that are heavily influenced by how an investor feels at the time.

Those feelings can be negative. A falling portfolio might create fear or anxiety, for example, making selling feel like a way to stop the discomfort of seeing further losses.

But emotional investing can also be driven by positive feelings. Rapidly rising prices can create excitement, confidence or a fear of missing out. An investment that previously attracted little interest may suddenly seem appealing because its price has risen or because other people are talking about it.

This means emotional investing is broader than panic selling during a market fall. It can influence decisions about when to buy, when to sell, how much risk to take and whether to change an existing investment approach.

The FCA makes a similar distinction in its investor education material. It warns that emotions can contribute to investment decisions that are rushed or driven by excitement, hype or instinct rather than a considered assessment of the investment and its risks.

Having an emotional response does not automatically mean the eventual decision is wrong. The important question is whether the decision still has a clear financial reason behind it.

What can emotional investing look like?

Emotional investing is often easier to understand through the sequence of events that leads to a decision.

The same process can operate in the opposite direction.

Someone might notice an investment after its price has risen substantially. Stories about other investors making money can increase the sense that an opportunity is disappearing. Instead of beginning with the investment’s characteristics and risks, the decision begins with the desire not to be left behind.

FCA research published in 2024 found that 51% of surveyed investors aged 18 to 40 said they had put more money into an investment than originally intended because of fear of missing out (FOMO). The finding relates specifically to the population surveyed and should not be assumed to describe all UK investors, but it illustrates how feelings and social influences can affect investment decisions.

Emotional investing can also be less dramatic. Frequently changing investments after short-term movements, taking more risk after a period of gains or abandoning an investment approach because recent results have been disappointing can all involve an emotional element.

Why do investment decisions become emotional?

Investing requires decisions to be made without knowing exactly what will happen next.

An investor can research an investment and understand its risks, but they cannot know with certainty what its price will be next month or several years from now. That uncertainty can feel very different once money is actually invested.

A market fall makes a possible loss visible. Instead of thinking abstractly about an investment being capable of falling in value, the investor can now see that loss reflected in their own portfolio.

Market volatility can consequently create fear and anxiety. FINRA, the US financial-industry regulator, notes that turbulent markets can provoke both emotions in investors.

Rising markets can create a different form of pressure. Watching prices rise may create excitement or regret about gains that have already been missed. Other people’s apparent success can intensify that feeling, particularly when investments are being widely discussed online.

The FCA describes how hype, peer pressure and FOMO can create a sense of urgency around investment decisions. That urgency matters because it can shift attention away from questions such as what the investment actually is, what risks it carries and why it would be held.

The underlying emotion may therefore change with market conditions, but the effect can be similar: the immediate movement in price starts to influence the decision more strongly than the longer-term reasoning behind the investment.

How emotions can change decisions in rising and falling markets

It is easy to associate emotional investing only with fear during a market downturn. In practice, strong markets can create their own emotional pressures.

These reactions can create a difficult pattern.

An investment may feel most uncomfortable after prices have already fallen and most attractive after prices have already risen. If decisions repeatedly follow those feelings, an investor can find themselves reacting to what markets have recently done rather than following a consistent reason for investing.

That does not mean buying after a rise or selling after a fall is inherently irrational. Price movements sometimes accompany genuinely important new information. The distinction depends on why the decision is being made.

An emotional decision is not the same as changing your mind

Recognising emotional investing should not lead to the opposite misconception: that an investor should simply ignore everything that happens after making an investment.

Circumstances change. New information becomes available. Financial goals can change, an investment may develop differently from what was expected, or the amount of risk within a portfolio may no longer reflect what the investor intended.

Those can all provide reasons to reassess an investment.

This distinction is important because an investment plan is not supposed to prevent decisions from ever changing. Its purpose is to provide a framework against which new decisions can be considered.

If the facts have changed, reassessment may be reasonable. If only the emotional response to a price movement has changed, it can be useful to recognise that difference before deciding what the movement means.

How can you recognise emotion influencing an investment decision?

Emotional investing is not always obvious while it is happening. A decision can feel entirely reasonable when fear or excitement is strongest.

One useful distinction is between new information and a new feeling about existing information.

Suppose an investor knew when buying an investment that its value could fluctuate substantially. A later fall does not necessarily provide new information about that risk; it may simply make a risk that was previously theoretical feel much more immediate.

By contrast, something fundamental about the investment might genuinely have changed. Alternatively, the investor’s own objective, time horizon or financial circumstances might now be different. Those are new facts that can reasonably form part of a reassessment.

Before acting, several questions can help separate the two:

• What has actually changed? Is there new information, or has the recent price movement mainly changed how the investment feels?
• Why am I considering this decision now? Would the same decision have seemed necessary before the latest rise or fall?
• Has my original reason for investing changed? If it has, identifying exactly what changed makes the reasoning clearer.
• Am I reacting to other people’s behaviour? Hype, social media and stories about other investors’ gains can create pressure that has little to do with the investment itself.
• Would I reach the same conclusion without the urgency? Feeling that something must be done immediately can itself be a sign that emotion is exerting greater influence.

These questions do not determine whether an investor should buy, sell or hold. Their purpose is to make the reasoning behind the decision more visible.

That can be particularly useful when markets are moving quickly, because urgency can make it harder to distinguish between responding to meaningful information and responding to the discomfort or excitement created by the movement itself.

Emotional investing and behavioural biases

Emotional investing overlaps with several ideas studied in behavioural finance, which looks at how psychological and social influences can affect financial decisions.

For example, loss aversion can help explain why losses may feel particularly powerful. Recency bias can cause recent events to receive more weight than they deserve when thinking about what might happen next. Herd behaviour can influence people when they see others buying or selling, while overconfidence can affect how investors judge their own ability after successful decisions.

These concepts help explain particular aspects of investor behaviour, but emotional investing is the broader idea.

An investor does not need to identify a particular behavioural bias every time they feel nervous or excited. The more fundamental question is whether that feeling is beginning to replace the reasoning on which the investment decision would otherwise be based.

Conclusion

Investing can create genuine emotional reactions because the outcomes matter. Seeing money fall in value can be uncomfortable, while rapidly rising markets can make opportunities feel urgent.

The objective is therefore not to become an emotionless investor. It is to recognise the difference between feeling something about an investment and using that feeling as the principal reason to make a decision.

A change in circumstances, objectives or relevant information can justify reconsidering an investment. Fear after a fall or excitement after a rise can also prompt reconsideration, but those feelings do not themselves explain whether the investment has fundamentally changed.

Understanding that distinction makes emotional investing easier to recognise. It creates room to examine what has actually changed, return to the reasoning behind the investment and make the eventual decision on a more considered basis.