In times of increased market volatility, especially the share market, irrational decision-making can arise amongst some investors. This can occur when cognitive bias creeps in and influences their decision-making process.
Cognitive bias is a systematic error in reasoning, evaluating, remembering, or other cognitive processes. Well-known investing cognitive biases are confirmation bias, optimism bias, loss aversion, recency bias, and herding.
It’s important to remember that no one asset or type of asset provides the best performance over all time periods. They tend to rise and fall at different times depending on economic, political and market factors.
And, it can be extremely difficult to pick the top or bottom of a market cycle. This can mean missing out on some of the best performing days in the market and have flow-on effects for long-term portfolio performance.
In a nutshell, rational decision-making, especially in times of increased market volatility, can often make all the difference to the accumulation and preservation of wealth.
In this video by Morningstar, market volatility and long-term investment fundamentals are discussed.