Recognize loss aversion and recent-performance bias. Use a balanced scenario to separate genuine spending needs from an impulse to change the entire portfolio.
February 23, 2026 · Financial Forte Staff
Historical article: prepared retrospectively using information available as of February 23, 2026.
It is possible to understand investment risk and still feel a jolt when an account balance falls. Money represents years of work and future choices, so concern is not a failure of discipline. The important question is what happens between feeling that concern and placing a trade.
A useful review separates new information from the emotional weight of a recent experience. Sometimes the right response is to leave the plan alone. Sometimes a change in spending needs, concentration or risk tolerance means the plan should change. Neither decision should depend only on how the latest statement feels.
Recognize the pattern without dismissing the concern
Loss aversion describes the tendency to experience losses more strongly than comparable gains. It can influence both selling in fear and holding a losing investment solely to avoid acknowledging the loss. A purchase price can become an emotional reference point even when the investment's future role has changed. [1]
Recency bias gives unusually heavy weight to what happened most recently. A strong stretch can make further gains feel inevitable; a decline can make further losses feel certain. Research on investor behavior also describes the risks of extrapolating recent performance and trading on noise rather than a considered assessment. [1]
These labels are useful only if they help you examine a decision. They should not become a way to tell yourself that every concern is irrational. If you will need money sooner than expected, the shortened timeline is a real planning change.
Ask what specifically has changed: the investment, the household or the feeling. More than one answer can be true. Writing them separately makes the next conversation with an adviser more productive.
Follow the decision beyond the first trade
Daniel is a hypothetical investor whose $400,000 portfolio falls 15% to $340,000. He wants to sell everything because he cannot bear another decline. His long-term goal is unchanged, but he has not reviewed how much of the portfolio he needs soon.
Selling would convert the current holdings into cash at the available prices. It would remove their future market exposure, including the opportunity to participate in a recovery. Daniel would then face another decision: when and how to invest again. There is no guarantee that waiting will produce a better entry point.
Suppose, purely for illustration, that the investments he sold subsequently rose 10% while his cash value was held constant to isolate the comparison. The invested value would be $374,000, versus $340,000 in the simplified cash case. That $34,000 difference ($374,000 less $340,000) is an opportunity-cost illustration, not an expected return.
The opposite outcome is also possible. If the investments instead fell another 10%, their value would be $306,000. Cash would have avoided that modeled $34,000 decline before considering interest, inflation and taxes. A fair discussion acknowledges both directions rather than using only a rebound story to persuade Daniel to stay invested.
The better question is whether the original allocation still fits. Daniel discovers he needs $18,000 for a planned expense within six months. That specific need deserves a funding decision even if selling the entire portfolio would be disproportionate. [2]
Replace a prediction with a decision rule
Daniel can identify which assets were intended for near-term spending, review any existing cash reserve and evaluate the cost of raising the required amount. If the expense was previously omitted, the plan needs correcting. Calling the concern “emotional” would miss the real problem.
For the remaining long-term money, compare the current allocation with the intended mix. Market changes can alter the proportions without any trades. Rebalancing may involve purchases or sales, with transaction costs and tax consequences considered. It does not guarantee a profit or prevent a loss. [2]
A written rule can make the process more consistent: review when the allocation moves outside an agreed range, when a major spending need changes or at a scheduled interval. The rule should reflect the household's plan rather than a percentage copied from someone else's portfolio.
Also ask whether repeated distress signals a mismatch between the stated risk tolerance and the risk actually being taken. A sustainable allocation can be more useful than an aggressive one that feels acceptable only while markets rise. The adjustment should be deliberate, with the long-term tradeoffs understood.
Give yourself a short pause with a purpose
Before a significant trade, write down the reason, the evidence and what would cause you to reconsider. If the reason is “this has been going up,” examine valuation, concentration and the investment's purpose. If it is “I need the money,” identify the amount and date, then check whether the proposed trade raises that amount without unnecessarily changing the rest of the plan.
A pause is not a requirement to ignore urgent circumstances. Fraud concerns, an imminent payment or a material change in an investment may warrant prompt action. The goal is to make the action responsive to the problem rather than to the loudest feeling.
Keep the written reason with the decision record. Review the decision afterward using the information available when it was made, not just the next price movement. A sensible decision can have an unfavorable short-term outcome, and a poorly reasoned trade can get lucky. Building a repeatable process gives your financial plan a better chance of remaining useful when emotions run high.
Related reading
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Educational information, not personalized investment, tax, legal or benefits advice. Examples use hypothetical assumptions. Verify current rules and your circumstances before acting.
