Why your emotions are the biggest risk to your money

One of the biggest hurdles every investor faces is emotion. Because it’s just as easy to feel invincible when markets rise as it is to sell in panic when markets fall.

However, I want to make the case for just riding it out: the highs, and the lows. Because it’s been proven that you can only benefit from removing emotion from your investment decisions.

Staying invested for longer is simply the best way to grow your wealth over time. Just have a look at the returns in the S&P 500 over the past five years. By early July this year, the index was up more than 70%. Over one year, that growth was a still impressive 19%.

Source: Moneyweb

What this shows is that the longer you stay invested, the better the chances of higher returns. More importantly, this equation ignores the growth you need to recover losses if you sold when the market fell.

The cost of recovering losses

It’s important to accept that markets go up and they go down. It’s what you do when this happens that’s most important, because selling when markets fall lock in your losses.

Look at this graph to see how this impacts your ability to recover, because the deeper the loss, the bigger the gain you need to recover it.

A 10% loss doesn’t need a 10% gain to break even. It needs 11%. A 20% loss needs 25%. A 50% loss needs 100%.

Source: LinkedIn

The danger of switching to money market after a fall

One of the biggest mistakes you can make is switching to cash after the market has already fallen. It feels safe, but it usually isn’t.

As shown in the graph, you need exceptional returns to recover your capital if you’ve sold at a low point.

Let’s say your R1 000 000 investment falls 20%, to R800 000. If you stay invested, a 25% recovery would take you back to R1 000 000.

But if you switch that R800 000 to a money market, and you might be earning interest, but also possibly miss the recovery entirely.

Even a steady money market return can leave you sitting well below your original value while the market has already turned. That’s the quiet danger of cash: it feels calm, but it gets expensive fast if it keeps you out of the recovery.

Staying invested doesn’t mean doing nothing

Staying the course doesn’t mean sitting on your hands. It means having a strategy in place before the market falls, not scrambling for one once it has.

Here’s the practical part.

Money you’ll need soon shouldn’t be sitting in equities. Put it in cash, income funds, or a money market account instead.

Your long-term money is different: give it time, and it grows. Equities will bounce around in the short term. Over the long term, they’re still one of the best wealth-builders you’ve got.

A good plan does three things. It spreads your risk. It gets reviewed regularly. And it gives every rand a job to do. Your short-term money keeps you stable. Your long-term money builds your wealth. Mix the two up when markets get scary, and that’s when the real damage happens.

The real lesson

The graph makes one thing clear: losses take patience to recover. The bigger the fall, the more it costs you to make an emotional decision at the wrong time.

Switching to money market after a fall may feel safe, but it can lock in your loss and leave you watching from the sidelines when the recovery starts. In most cases, the better move is to review your plan, rebalance where needed, and give your long-term investments the time they need.

Successful investing was never about avoiding every correction. It’s about being positioned to survive them, recover from them, and be there for the growth that follows.

Markets reward discipline more often than drama, and drama, unfortunately, does not compound. The trick for investors is to recognise the risk you pose to your own financial future by making knee-jerk decisions.

You don’t beat fear with willpower. You beat it with confidence, knowing your plan is right. That’s exactly what a good financial adviser gives you: an outside view, without the emotion attached.