Why your emotions may be preventing you from getting the most out of your investments

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For those who keep a close eye on their investments and trade daily, it’s possible your emotions are preventing you from seeing more consistent and lucrative returns.

Wave HQ CFO Michaella Gallina detailed how investor psychology — or the emotions, biases, and decision-making patterns that influence how people invest — plays an important role in a person’s portfolio.

The three biases she particularly pays close attention to are loss aversion, recency bias, and confirmation bias.

“I think loss aversion is fascinating because it’s essentially the concept that we feel losses as an investor at two times the rate of the emotion that we feel joy when it comes to gains,” Gallina said on a March 4 Stocks in Translation podcast. “I think just being aware of these cognitive behaviors is the first step. Understanding that you can make emotional decisions and it can hurt you versus staying the course over the long term … is always the first step.”

Gallina noted that loss aversion is the most damaging bias for many investors’ portfolios, resulting in a “much more lasting effect” than some of the other biases that affect trading decisions.

She pointed to a 2024 JPMorgan survey that found 40% of retail investors tended to sell at market lows.

“So they’re feeling those losses even more,” she said. “And then the emotional toll on top of that is even greater. So these emotional swings can cause really terrible decision making.”

It’s easy for an investor to look at the short-term trends in the markets and make knee-jerk decisions in reaction to these cycles. Gallina argued that sticking to your investments, even through downturns, can actually net you larger and more consistent returns.

Read more: What is passive income, and how do I generate it through investing?

That said, Gallina noted that biases can even influence passive strategies. She explained that if you’re following the markets, you might be hearing in the news that you should rely on diversified ETFs. If you decide to sit on the sidelines with a passive strategy, that may also reflect recency bias or confirmation bias, as you may be relying on recent information or not challenging prior beliefs.

“We tend to be more influenced by short-term news and headlines than we are long-term trends,” Gallina said. “And so as the market evolves, I could see traders who might think of passive strategy right now as the right thing over time may think differently — or the same.”