You Can Outsmart Your Instincts: Avoiding Panic in Market Downturns

Understanding the Psychology Behind Panic Selling

When markets decline, fear can often take control. For many investors, seeing their portfolio shrink triggers the urge to pull out, cut losses, and seek safety. But this reaction—while deeply human—is typically imprudent. Behavioral finance research led by Nobel Laureate Daniel Kahneman shows that we are loss-averse: losses feel about twice as painful as equivalent gains feel rewarding.¹

This loss aversion is just one of many cognitive traps investors can fall into during turbulent times.

Behavioral Biases That Can Derail Investors

Mark Matson discusses in his trainings the following psychological biases that can often lead to making poor decisions:

• Recency Bias: Placing too much weight on recent performance. If markets have been falling for a few months, investors can assume they’ll keep falling indefinitely.
• Confirmation Bias: Seeking out information that supports pre-existing fears or beliefs. This creates an echo chamber that reinforces panic.
• Herding Bias: Copying what others are doing—especially in the face of uncertainty—even when it goes against your plan. Herding is good for zebras but bad for investors.
• Familiarity Bias: Over-investing in well-known or “safe-feeling” companies without assessing their actual risk.

These biases can often lead to reactive decision-making in investing, as well, like selling at market bottoms and buying at market peaks.

How to Fight Back: Coaching, Discipline, and Rebalancing

To help avoid costly mistakes, investors should rely on structure and support:

• Financial Coaching: Research by Morningstar’s David Blanchett, published in the Journal of Financial Planning, found that developing goals based on a financial plan can add about 1.6% more to your portfolio returns each year.²
• Evidence-Based Strategy: Investors should adopt a long-term investment strategy based on academic research—not on headlines. Predicting short-term market movements can be imprudent and unreliable. Matson Money’s Portfolio MRI® is a diagnostic assessment of the asset allocations within your investment portfolio. It can estimate the mix of your current portfolio and simulate its historical risk and reward characteristics—giving you an inside view of how your investments are truly structured, much like a real MRI reveals what’s beneath the surface. With this deeper insight, you can uncover hidden risks, confirm alignment with your goals, and take proactive steps toward a healthier financial future.
• Rebalancing: This process involves periodically realigning your portfolio back to your target asset allocation. That means trimming back investments that are above their target allocation and reallocating to areas that have become underrepresented, helping to maintain your desired level of risk and long-term strategy.  For example, if your actual and preferred asset allocation is 80% stocks and 20% bonds, but when you assess your portfolio, it has drifted to 85% stocks and 15% bonds, it might be time to rebalance to keep your financial strategy on track.

The Importance of Preparation

As Mark Matson has stated, “You have to prepare people with the understanding up front that left to their own devices, their own instincts and subconscious are the enemy.”

The solution isn’t to eliminate emotions—it’s to be aware of them and plan around them. Building a portfolio that matches your risk tolerance, creating a financial plan that you can reference, and working with someone who can help you stay disciplined can make all the difference.

How to Stay Grounded When Markets Get Rough

• Have a plan: A prudently allocated, globally diversified portfolio aligned with your goals and risk tolerance.
• Stress test your risk tolerance and emotions: Ask yourself—how much of a drop in equities can you live with?
• Document your decisions and stay educated: Understanding how markets work, why corrections happen, andwriting down your strategy so you can reference it later, can help you stay calm and not panic.
• Lean on a coach: Get an advisor coach who can help you stay disciplined and guide you through the highs and lows of the financial market.

Discipline is a Wiser Choice than Prediction

Panic is not a strategy. Investors should understand that market downturns are part of the investing process, not the end of it. Decades of market returns have consistently demonstrated that declines are a natural and recurring aspect of investing. While markets tend to rise over the long term, downturns—ranging from modest pullbacks to severe crashes—have occurred frequently. Since 1928, the US stock market has experienced 25 bear markets, defined as declines of 20% or more from recent highs.³ On average, these bear markets occur approximately every 4.8 years and last about 9.6 months.³ However, historically, markets have rebounded after turns, often reaching new heights over time. Selling during downturns often results in missing the strongest recovery days. By recognizing emotional pitfalls, building a resilient plan, and committing to long-term discipline, you can navigate any market storm with confidence.

Building Emotional Resilience into Your Portfolio

Market volatility is inevitable, but panic doesn’t have to be. Understanding the psychological forces that influence decision-making—especially in high-stakes financial environments—can help empower investors to respond thoughtfully rather than react impulsively. As Mark Matson puts it, “If you see a saber-tooth tiger, you’re supposed to run—that’s a survival instinct. But when the market is down, you don’t run. That’s the moment to stay put, stay disciplined, and trust the process.”

With a prudent investment plan, the courage to rebalance during tough times, and the guidance of a seasoned financial coach, investors can not only weather downturns but emerge stronger and more confident on the other side.

In today’s complex financial landscape, discipline can be your best defense. Your instincts may scream for safety—but history and data show that staying the course more often leads to more positive outcomes. The next time the market wobbles, remember: success isn’t about predicting the future. It’s about preparing for it. Want to learn more? Register to attend the American Dream Experience, and discover what investing is, how it works, and how it can fulfill on your purpose for life.

DISCLOSURES:

This content is based on the views, opinions, beliefs, or viewpoints of Matson Money, Inc.  This content is not to be considered investment advice and is not to be relied upon as the basis for entering into any transaction or advisory relationship or making any investment decision.

All of Matson Money’s advisory services are marketed almost exclusively by either Solicitors or Co-Advisors.  Both Co-Advisors and Solicitors are independent contractors, not employees or agents of Matson.

Other financial organizations may analyze investments and take a different approach to investing than that of Matson Money. All investing involves risks and costs. No investment strategy (including asset allocation and diversification strategies) can ensure peace of mind, guarantee profit, or protect against loss.  

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS

Recency Bias: The human tendency to overemphasize more recent data.

Recency Bias: Nofsinger, John R. and Varma, Abhishek. ‘Availability, Recency, and Sophistication in the Repurchasing Behavior of Retail Investors’. 9 January 2013. Journal of Banking and Finance.. <http://ssrn.com/abstract=2214216 > Web. Accessed 22 January 2020. Page 37(7)

Confirmation Bias: The tendency to search for, interpret, favor, and recall information in a way that confirms one’s preexisting beliefs or hypotheses. Wikipedia contributors. Confirmation bias. Wikipedia, The Free Encyclopedia. 14 October 14 2019.  <en.wikipedia.org/w/index.php?title=Confirmation_bias&oldid=921270721>.  Web.  Accessed 24 October 2019.

Herding Bias: The phenomenon where investors follow what they perceive other investors are doing.

Herding Bias: Chen, James. ‘Herd Instinct’. Investopedia. 14 August 2019. <http://www.investopedia.com/terms/h/herdinstinct.asp > Web. Accessed 23 October 2019.

Familiarity Bias: Familiarity bias leads investors to gravitate towards investments within their comfort zone, such as local companies or sectors they have experience with. This preference stems from a natural human inclination to stick with what is known and understood.  https://www.trustnet.com/investing/13430618/familiarity-bias-the-local-investment-trap Web accessed 23 January 2025

1. Loss Aversion. https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/loss-aversion
2. The Value of Goals-Based Financial Planning. David Blanchett, CFP, CFA. June 2015. https://www.financialplanningassociation.org/article/journal/JUN15-value-goals-based-financial-planning
3. A Brief History of US Bear Markets. Mark Kolakowski. August 6, 2024. https://www.investopedia.com/a-history-of-bear-markets-4582652