The human side of investing!
The conflict in Iran is yet another reminder that investing is difficult when we live in a world where the likely outcomes can feel unpredictable. When we live with volatility, we, as advisers, tend to reflect on risk and the application of it in the construction of investment portfolios.
Of note, the consistent observation is that…. There is a human side of investing that should always be at the forefront of all investment decisions.
To explain, we believe successful investing is not about predicting markets or reacting to headlines. It’s about designing an investment strategy that is grounded in evidence, aligned with your goals, and realistic about how people experience uncertainty over time. This provides an investor with the opportunity to remain focussed on their portfolio & long-term objectives and drown out the voice in your mind that creates doubt and fear.
That said, humans are emotional creatures and understanding the emotional side of investing is equally important as the investment fundamentals.
Behavioural Characteristics: The Human Element
When markets fluctuate, our reactions are often emotional before they are rational. This is hard‑wired. Periods of market stress naturally trigger discomfort, doubt and a desire for certainty. Losses feel more significant than gains, recent events can feel overwhelming, and the temptation to change course can increase — even when long‑term logic remains sound.
This does not mean something has gone wrong with either the investor or the investment strategy. It means the experience is human.
Behavioural finance helps us understand these responses. It explains why short‑term movements can feel disproportionate to their long‑term importance, why uncertainty can feel more threatening than it really is, and why doing nothing can sometimes feel harder than taking action — even when staying the course is objectively the better decision.
Importantly, this insight is not used to “correct” emotions or expect investors to behave perfectly. Instead, it helps inform how an investment strategy should be designed in the first place.
By acknowledging that markets will test confidence from time to time, portfolios can be structured with clearer purpose, realistic expectations and appropriate levels of risk. This reduces the likelihood that normal market behaviour leads to unnecessary stress or reactive decisions.
The goal is not to remove emotion from investing — that would be unrealistic. The goal is to ensure that emotional responses do not derail a well‑considered plan or distract from the outcomes your investment strategy is designed to deliver. When behaviour is recognised and accounted for upfront, investors are better positioned to remain focused, informed and confident — even when markets are uncomfortable.
How the Brain Responds in a Market Crisis
When markets fall sharply—such as during the COVID‑19 share market correction in early 2020—the brain’s response is not analytical, but primal. The part of the brain responsible for threat detection, becomes dominant. This triggers a fight‑or‑flight response, narrowing focus and elevating fear.
From a behavioural finance perspective, several biases become amplified during these periods:
- Loss aversion: losses feel significantly more painful than equivalent gains feel rewarding, leading investors to prioritise stopping the pain rather than achieving long‑term outcomes.
- Recency bias: recent poor returns are subconsciously extrapolated into the future, making recovery feel unlikely or distant.
- Action bias: doing “something” (selling, switching, going to cash) feels safer than staying the course, even when it is objectively harmful.
Traditional risk profile questionnaires rarely test these reactions. An investor may believe they are comfortable with volatility in calm conditions, but crisis reveals how theory and reality diverge.
Risk Tolerance vs Required Risk
Risk profiles are designed to measure how much risk an investor can tolerate. What they do not answer is the more important question:
How much risk do they actually need to take to achieve their objectives?
An investor with a long investment time horizon and modest income needs may not require an aggressive portfolio to achieve their goals. Conversely, another investor may need to accept a higher level of risk—whether they like it or not—if their objectives are ambitious and time is limited.
This distinction is critical. Taking more risk than necessary exposes investors to emotional stress without improving outcomes. Taking less risk than required increases the likelihood of shortfall. Neither is ideal.
Behaviour as a Design Constraint
An extension of risk required v risk tolerance is understanding that behavioural characteristics should act as a constraint on portfolio design, much like tax, liquidity, or regulatory considerations. A portfolio that looks optimal on paper but cannot be emotionally maintained is not truly suitable.
By aligning risk, goals and behaviour, investors are better equipped to stay invested during periods of volatility, make fewer emotionally driven decisions, and remain focused on outcomes rather than noise. Good investment advice lives at the intersection of what is possible, what is required, and what is humanly achievable.
Building Portfolios Around Outcomes
An evidence‑based approach starts with clarity around objectives:
- What is your money meant to provide?
- When do you need it?
- How flexible are those plans?
- Do your existing resources give you a margin of safety?
Only after answering these questions does investment risk take on meaning. Risk becomes a tool — used deliberately and efficiently — rather than something to maximise or minimise in isolation.
This allows portfolios to be structured so that different assets play different roles. Long‑term growth assets are used where growth is genuinely required. More stable assets are used where certainty, capital protection or income is the priority. Each part of the portfolio has a job to do.
From there, risk becomes a tool, not an objective. Growth assets are used where they are genuinely required to meet long‑term goals. Defensive assets are used where stability, income or certainty are more important. This also allows for practical portfolio structures such as:
- Allocating capital into short‑term liquidity with a sole focus of allowing the investor to feel safe.
- Where income is required, allocating sufficient capital to meet the income needs of the investor.
- Allocating funds for long-term growth or as we often refer to it as legacy money. This is the portion of an investor’s portfolio that is about maximising return and building your long-term wealth.
Of note, when portfolios are constructed where each asset is aligned to a specific purpose, the emotional side of investing can often be easily overcome when the investor has confidence that their strategy it clearly and carefully aligned to the outcome they want over time.
Bringing It All Together
The strongest investment strategies sit at the intersection of:
- clearly defined goals and objectives,
- realistic assumptions about what is required to achieve them, and
- an honest understanding of how you experience risk as a human being.
When these elements are aligned, investors are better prepared to remain focused, confident and consistent — regardless of what markets are doing at any point in time.
Because good investing is not about predicting the future, it’s about designing an investment strategy that addresses the things that matter most to you and above all else, to live the life you want.