Why do some investors buy high and sell low? It's the same reason some liquidate their investments and go all in on a single position: emotions. Emotions and investing are closely linked — emotions are arguably the worst driver of investment decisions, yet they influence nearly every investor.
Why is it that some investors describe investing as a roller coaster, while others treat it as a simple transaction? Unfortunately, some investors react more strongly to emotion than to the information in front of them.
The Rational Planner vs. the Emotional Reactor
Most investors can be loosely categorized as either a rational planner or an emotional reactor. The rational planner views investing as a long-term strategy. The emotional reactor is an investor who overrides data and strategy with emotion.
The Emotional Cycle of Investing
The classic investor emotional curve runs: optimism → excitement → euphoria → anxiety → denial → fear → panic → depression → capitulation → hope → relief → optimism.
Optimism — At the beginning, most investors are optimistic about their investments. It's human to want things to go your way.
Excitement — As markets move, investors get excited about the possibility of greater gains.
Euphoria — Investors may experience euphoria as markets reach the top of the cycle. During this phase, investors may begin to believe they can tolerate higher risk levels, and therefore invest in riskier asset classes or increase trading frequency. Unfortunately, this can come with a belief that positive times will continue indefinitely.
Anxiety — For emotional investors, euphoria turns to anxiety as soon as the market dips. Will the investment lose profits, break even, or become a complete loss?
Denial — When the market pulls back from a small dip, some investors will believe that things will improve and hang on to underperforming positions.
Fear — As losses accelerate, fear sets in.
Panic — Investors who missed the profits and are desperate to get back in the black may consider selling their performing investments or moving into new assets that don't fit their original risk profile. Panic sets in as paper profits shrink.
Depression — During this phase, investors feel the realities of a bear market and become desperate and discouraged.
Capitulation & Dependency — In this part of the cycle, investors may abandon their investing strategy altogether. Many feel at the mercy of the market, and some quit investing entirely.
Skepticism — When the market starts to rise, many investors experience skepticism. Will the market continue to rise, or was the move just a blip? Many will be cautious about their next move, reluctant to invest new money even when prices are relatively low and opportunities look attractive.
Hope > Recovery > Optimism — As the market recovers, investors who let their emotions dictate decisions can restart the cycle from the beginning.
Why Investors Miss the Best Days
In a recent Manhattan West State of the Market update, we highlighted a real-time example of how headline-driven decisions can erode capital: an investor exited a position in the U.S. defense sector after reacting to a presidential social media post that negatively framed the industry. Just over two hours later, a follow-up post released shortly after the market closed reversed the narrative entirely.
The result: a portfolio locked into losses with no exposure to the subsequent recovery. This scenario illustrates a critical but often overlooked dimension of market timing risk — investors who exit positions based on short-term volatility don't just miss abstract "best days." They systematically miss the snapback rallies that immediately follow the very events that triggered their exit. The psychological pattern is predictable: negative news prompts selling, but by the time clarity emerges or sentiment reverses, the investor is on the sidelines watching their former position recover without them. This creates a compounding effect where emotional exits lock in drawdowns precisely when positions are most oversold, while the subsequent mean reversion accrues to those who maintained their positions through the uncertainty.
The "best days" aren't randomly scattered across the calendar. They tend to cluster around periods of heightened volatility and negative sentiment — the exact moments when reactive investors have already fled. The data illustrate the cost of missing them:
| Annualized Return, S&P 500 Total Return Index (2005–2024) | |
|---|---|
| Fully invested | 10.40% |
| Excluding top 10 days | 6.10% |
| Excluding top 20 days | 3.50% |
| Excluding top 30 days | 1.30% |
| Excluding top 40 days | -0.60% |
Source: Charles Schwab Quarterly Chartbook, Q4 2024, as of 12/31/24; underlying data from Bloomberg. Past performance is not indicative of future results.
The Role of Confidence in Investing
Confidence is key when investing. When you are confident in your strategy, you are less likely to be overcome by emotion and stray from your original plan.
Overconfidence can lead an investor to overestimate their abilities, resulting in riskier investments or overtrading. A lack of confidence, on the other hand, can result in decision paralysis and missed opportunities.
With the right level of confidence, an investor can anchor decisions in data and fact rather than emotion. Balanced investors do their own research before making changes to their investing plan when they read unsettling headlines.
Strategy & Key Investor Takeaways
Revisit your plan: Discipline is built through clarity and consistent review of your strategy.
Diversify with intent: Balance liquidity, income, and growth across assets and emotional triggers.
Stay grounded: Professional guidance creates distance between fear and decision. In our view, this is one of the more underrated roles an advisor plays — acting as an emotional shock absorber and a source of perspective during volatile times.
Conclusion
Market cycles do just that — they come and go, and will continue to do so. Investor behavior remains one of the more persistent factors shaping long-term investment outcomes. While buying high and selling low isn't most investors' intended strategy, it can be a consequence of emotional decision-making. If investors are aware of the role emotions play in investing, they can change that pattern. In uncertain markets, in our view, confidence is one of an investor's most valuable assets — and unlike most assets, it compounds the longer it's sustained. Having a clear understanding of your goals and a well-constructed plan can help you navigate volatile markets.