Investing in the stock market is not just about numbers; it is deeply connected to your emotions. Most investors believe they make fully rational decisions, but in reality, many choices are influenced by emotions. Whether it is fear, greed, or the urge to follow the crowd, this behaviour is known as emotional investing.
In a rapidly growing market like India, where retail participation is rising every day, this trend has become even more noticeable.
Let’s understand what emotional investing is, how it can hurt your portfolio, and most importantly, how you can avoid it.
What is Emotional Investing?
When investors make decisions under the influence of emotions such as fear, greed, excitement, or panic, it is called emotional investing.
For example, when the market rises, investors often buy more stocks due to positive sentiment, and when the market falls, they panic and sell.
Emotions are natural, but when they drive financial decisions, they often lead to impulsive actions, frequent buying and selling, and weak outcomes. This causes investors to abandon long-term strategies, chase short-term gains, or enter and exit the market at the wrong time.
Common Investor Biases You Must Understand
While investing, our thoughts and emotions influence our decisions. These patterns are called behavioural biases. They can lead to poor decisions and weaker returns. Let us understand them:
Optimism Bias: Investors believe their chances of loss are low and that they can outperform the market. This overconfidence often pushes them to take risky decisions without proper analysis.
Familiarity Bias: Investors put money only into companies or sectors they are familiar with. This reduces diversification and increases risk.
Anchoring Bias: Investors remain stuck to old information or outdated price targets, even when circumstances change. As a result, they continue holding loss-making stocks.
Loss Aversion: Due to the fear of loss, investors hesitate to act at the right time. They hold on to losing stocks and sell good stocks too early.
Herd Mentality: Investors who follow what others are doing become part of the herd. This often leads to buying at peaks and selling during corrections.
COVID Crash: When Fear Changed the Market’s Direction
In December 2019, the sudden outbreak of the COVID-19 pandemic shook the world. Governments imposed lockdowns to contain the virus, creating fear and uncertainty across industries and raising concerns of economic damage. As a result, global stock markets witnessed a historic crash in March 2020.
On 9 March 2020, the Dow Jones recorded one of its biggest single-day declines, falling 7.79%. The fall continued, on 12 March it dropped 9.9%, and on 16 March it plunged 12.9%. India also faced severe consequences. The BSE Sensex fell 8.18%, and shortly after the market opened on 9 March 2020, many stocks hit lower circuits, triggering panic among investors. The NSE Nifty also crashed 8.30% that day.
During this period, most investors dumped stocks out of fear, increasing supply and pulling prices further down. Long-term investors, however, chose to stay invested and wait for the recovery. Eventually, both the economy and the markets bounced back, triggering a massive bull run. By November 2020, the Sensex had already returned to its January 2020 all-time high.
This remains one of the strongest examples of emotional investing, showing how fear-driven decisions not only lead to losses but also cause investors to miss significant wealth-creation opportunities.
Herd Mentality: The Mistake of Following the Crowd
Herd mentality refers to situations where investors make decisions without doing their own research, simply because others are doing the same. A clear example can be seen in the Indian markets during the recent IPO boom, where investors rushed to apply for almost every new issue. According to an ETIG report, out of the 101 mainboard IPOs listed between January 2024 and May 2025, nearly two-thirds are now trading below their listing price.
This shows that following the crowd does not guarantee profits. The right investment decisions should be based on an investor’s risk profile, goals, and analysis, not emotions.
FOMO Investing: The Trap of ‘What If I Miss Out?’
FOMO, or Fear of Missing Out, occurs when investors invest quickly because they are afraid of missing an opportunity. Social media and online hype amplify this behaviour even further.
This trend was visible in the U.S. during the 1995–2000 tech rally, when many investors rushed into tech stocks after seeing others make profits. But when valuations corrected in 2021, many suffered massive losses. FOMO-driven trading turns investors into reaction-driven traders rather than strategic ones, affecting long-term goals and risking years of accumulated wealth.
How to Avoid Emotional Investing?
Avoiding emotional investing is not easy, but with discipline, awareness, and a strong plan, it can be controlled.
The first step is recognising that market cycles are normal. There will always be phases of strong rallies and corrections. Instead of panicking or getting overly excited with every market movement, accept that volatility is an inherent part of equity investing. Repeatedly trying to time the market or frequently changing your portfolio based on short-term trends only increases the chances of loss.
For long-term success, it is essential to keep investments diversified. Invest across different sectors, asset classes, and market-cap segments. Avoid emotional attachment to any single stock or fund, make decisions based on data and performance.
Wrapping Up
Fear and greed are two powerful emotions in the stock market, and the ability to control them often defines a successful investor. The 2020 market crash taught us that emotion-driven decisions usually end in losses. Successful investing relies on facts, research, discipline, and patience. When investors rise above their emotions, their portfolios come under their control, making it easier to achieve long-term financial goals.
*The article is for information purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
