Here is a stat that should make you uncomfortable. Research by investment firm Dalbar tracked investor returns over a 30 year period and found that the average equity fund investor earned roughly half the return of the S&P 500 over that same stretch. The fund performed fine. The people investing in it did not.
They were not victims of bad fund management or bad luck. They were victims of themselves. Buying after a run up, panicking during a dip, pulling out at exactly the wrong moment. The pattern repeated decade after decade, across millions of investors, regardless of how the market was performing.
That is the psychology of investing in a nutshell. And most people never examine it.
The GameStop Moment Nobody Likes to Talk About
Cast your mind back to early 2021. GameStop, a struggling high street video game retailer, somehow became the most talked about stock on the planet. Reddit forums were buzzing. Mainstream news was covering it. People who had never bought a share in their life were opening brokerage accounts specifically to get a piece of it.
At its peak, GameStop shares hit over $480. Within weeks they were back below $50.
The people who lost money were not foolish. They were just late. By the time something is generating that kind of noise, the people who made real money have usually already made it. What drove ordinary investors in was not analysis. It was FOMO, the fear of missing out on something everyone else seemed to be getting rich from.
Herd mentality is one of the most expensive psychological traps in investing. It feels safe to do what everyone else is doing. The crowd seems confident, so surely they know something you do not. But markets are forward looking. When a narrative becomes so popular that it is on the front page of every newspaper, it is almost always already priced in.
Why Losing Hurts More Than Winning Feels Good
Psychologists Daniel Kahneman and Amos Tversky spent years studying how people actually make financial decisions, not how they should make them in theory. One of their most cited findings is that the pain of a loss is psychologically about twice as powerful as the pleasure of an equivalent gain.
Losing £500 feels far worse than gaining £500 feels good. Most people already know this intuitively. What they do not realise is how much it shapes their investing behaviour in ways they cannot see.
It is why investors hold on to losing positions for far too long, unable to sell and crystallise the loss, always hoping for a recovery that may never come. It is why they sell winning positions too early, banking the profit before it disappears, instead of letting quality investments run. Both tendencies quietly erode returns over time, and neither feels like a mistake when you are doing it. Both feel like the rational thing to do.
This is loss aversion at work. And the antidote is not to feel less, it is to build rules in advance that your emotions cannot override later. Setting a clear exit strategy before you invest, both on the upside and the downside, removes the decision from the heat of the moment where your brain will almost always steer you wrong.
The Dangerous Comfort of Recent Memory
After two years of a rising market, most investors expect it to keep rising. After a crash, most expect more pain. This is recency bias, and it is responsible for an enormous amount of wealth destruction.
The pattern looks like this. Markets fall sharply. Investors, rattled by losses and convinced the worst is still to come, sell. Markets then recover, as they historically always have. Those same investors, now seeing green again and feeling optimistic, buy back in closer to the top. They have effectively sold low and bought high, the opposite of every piece of investing advice ever written, while feeling completely justified at every step.
Recency bias makes the recent past feel like a reliable guide to the near future. In most areas of life that is a reasonable heuristic. In markets, it is routinely catastrophic.
What Actually Helps
None of this is easy to fix because these are not logical errors you can just think your way out of. They are deeply wired responses. But a few things genuinely help.
Automating your investments removes the temptation to act. A monthly standing order into a broad index fund means you are buying in rising markets and falling markets without your emotions getting a vote. Over time that consistency compounds into something significant.
Writing down your reasoning before you invest is underrated. Not a vague sense that something feels promising, but a specific thesis. What are you buying, why, and what would have to happen for you to change your mind? When the noise gets loud later, that document is worth more than any news article.
And perhaps most importantly, checking your portfolio less often is almost always better than checking it more. Every time you look, you give yourself an opportunity to react. Most of those reactions will cost you.
The investors who beat the market over the long run are rarely the ones with the sharpest stock picks. They are usually the ones who have figured out how to get out of their own way.
Content on IceburgWealth.com is for informational purposes only and not intended as investment advice. While we strive to provide accurate and up-to-date information, Iceburg Wealth is not responsible for any errors or omissions, or for outcomes resulting from the use of this information. Readers should seek professional advice before making any financial decisions.