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If you’ve ever watched your portfolio take a nosedive during a market downturn, you have probably felt that gut-wrenching feeling, or an urge to “do something” before it’s too late. So why do so many investors throw in the towel on buy-and-hold, even when they know it’s usually the smarter move to weather out the market?
The reality is, buy-and-hold investing isn’t hard to do because the strategy is complicated – it’s hard because human psychology makes it difficult to actually implement. During bull markets, we find it easy to be disciplined buy-and-hold investors. But when markets turn south, that’s where we get tempted to abandon our strategy.
What is Buy-and-Hold and Why It Works
You have probably often heard that buy-and-hold is a better way to invest compared to trying to time the markets. Let’s first talk about what exactly is ‘buy-and-hold’.
It’s a long-term strategy where you invest thoughtfully and let time do the heavy lifting. Famous investors like Warren Buffett and Jack Bogle swear by it because it often beats active trading, especially after fees and taxes.
Overall, the idea is that despite bumps along the way, the stock market tends to rise over time.
Imagine picking a solid stock or ETF or mutual fund and then simply holding onto it, no matter what the market does, through ups and downs. That is essentially what buy and hold is.
A Real-World Perspective
Let’s look at a real-world example.
It’s January 2005. You invest $10,000 in the S&P 500, which you set aside for your child’s education or your retirement portfolio.
Over the next two decades, the stock market goes through a good number of significant drops: the 2008 Great Financial Crisis, the 2011 European Debt Crisis, the 2018 trade tensions, the COVID market crash of 2020, and technology stocks crash of 2022 (when stocks like Meta dropped around 77% and Netflix dropped by around 51%).
Each of these events or “crises” triggered widespread panic and led many investors-perhaps including your colleagues and friends-to sell out of their positions, to go to the safety of cash.
But not you. You stayed disciplined and tuned out the noise and fear, uncertainty, and doubt (FUD). By holding steady through December 2024, your initial $10,000 investment would have grown to around $71,750. That’s an annualized return of 10.4%.
But it’s not just the compound growth you benefited from. On the flip side, the damage from market timing can be devastating:
- Missing just the 10 best trading days during this 20-year period would have reduced your ending balance to $32,871. Your annualized return would only be 6.1%, less than half of the buy-and-hold investors’ earnings.
- Missing the 60 best market days would have given you a significant loss, leaving you with only $4,712. That’s a negative return on your original investment.
Behind the Psychology
Years of studies and data have shown that buy-and-hold is effective. So why do so many people abandon it?
Two words: human psychology.
When markets become volatile, we tend to react irrationally. Understanding the human psychology at play can help investors recognize impulses that can lead to bad decisions. Here are the three key cognitive biases that typically drive investors.
The first is loss aversion. This is a basic psychological principle where investors feel losses more intensely than equivalent gains. Research shows that the pain of losing is approximately twice as powerful as the joy of winning.
This bias leads investors to make irrational decisions during market downturns, such as selling investments early to avoid further perceived losses.
The second is recency bias. Recency bias causes investors to overemphasize and project recent events into the future. This typically leads to the belief that negative trends will continue during market downturns.
The COVID market crash in 2020 is a great example: investors who sold out of their stock positions in March 2020 based on recent negative performance would miss the massive recovery in global stock markets between March and December of that year.
The third is herd mentality, also known as following the crowd. We do what everybody else is doing because at least they’re doing something, right? We are social creatures, and we tend to follow others during times of market stress. But the problem is that this herding behavior often takes over our rational decision-making.
For example, when investors see widespread panic and selling, they feel like they better join in, which in turn, makes market downturns worse.
When Our Political Affiliations Affect Our Decision Making
Let’s fast forward to early April 2025. You’re sipping your morning brew and scrolling through headlines when you notice that only 43% of Americans approve of President Trump’s handling of the economy, while 55% disapprove.
This is the first time in his presidency that his economic approval rating has turned negative.
But what’s also interesting is that investors’ feelings about the economy are tied to which party is in office.
For instance, by February 2025, Republicans registered a positive Economic Confidence Index score (+24) for the first time since December 2020, while Democrats’ confidence dropped to -49.
This is a large reversal and it happened even though there was little fundamental change in actual economic conditions during the transition period.
And there’s more partisan divide when it comes to the people’s perceptions in other areas. According to YouGov data, 44% of Democrats rated their financial situation as good compared to just 29% of Republicans during Biden’s presidency.
Yet following Trump’s election, 55% of Republicans predicted financial improvement in 2025, compared to only 46% of Democrats.
But when asked about the country’s general situation, 65% of Republicans believed things would improve under Trump, while only 28% of Democrats felt this optimism. On the flip side, 52% of Democrats expected conditions to get worse, which is a view only held by just 15% of Republicans.
So, how do these political affiliations and constant headlines impact investors in reality?
Here’s the story of Yoram Ariely, an 82-year-old retired business owner from Longboat Key, Florida. For years, he preferred to leave his investments alone, riding out the market’s ups and downs without making changes.
But recently, when Yoram became concerned about the Trump administration’s economic policies — especially tariffs and government budget cuts — he decided to act. After years of holding steady, he sold nearly half of his stock holdings.
We can examine the story of Patton Price as well. Patton is a musician and former political consultant who sold all his retirement stocks around Trump’s inauguration, only to watch the market bounce back quickly and wonder when to jump back in.
This shows that emotional responses to political affiliations and developments usually override rational investment decision-making, which can lead to very costly timing mistakes.
I have a feeling that these types of stories are probably pretty common. Polls have shown how political leanings can sway economic optimism, where we flip back and forth with election cycles.
This can make it feel like a rollercoaster of emotions, but it’s definitely not a rational way to invest.
Final Thoughts
The news cycle is filled with fear, uncertainty, and doubt (FUD). It’s no wonder many investors feel jittery about their investment portfolios. As humans, it’s natural to want to “do something” when markets get rocky. On top of that political and economic uncertainty, experienced investors can even get shaken.
I recently met up with an old friend, and one of the things we talked about was the stock market. He said he had been closely following all the news around the impending trade and the intensifying tariff war with China.
He had kept his stock investment allocation steady over many years. But he felt he needed to protect his nest egg and decided to reallocate most of his funds in his 401(k) plan from growth stocks to a more conservative allocation of bonds, gold, and money market funds.
But within just a few weeks, stocks rebounded sharply as news of the trade war eased, and he suddenly regretted selling out of his stock funds. He asked me what my thoughts were about the recent stock market selloff. I said that if your time horizon as an investor hasn’t changed, market selloffs are typically a great time to pick up high-quality stocks on sale.
Maybe you think selling now will save you from losses, or you’re waiting for a “better time” to jump back in. But the reality is that the “perfect moment” rarely comes. And even when it does, you may not be willing to pull the trigger. That’s because once you move to cash, it might feel safe, but it also makes it harder to get back in.
So the next time the market takes a dip or there’s a panic, before you decide to jump ship on your strategy, consider taking a step back and:
- Accept volatility as normal and part of investing.
- Remember that your portfolio is politically agnostic – it doesn’t care which party box you checked at the ballot.
- Limit how often you check your portfolio. This can also reduce your stress levels.
- Stick to your plan.
There’s a good reason why financial professionals tell you to: focus on long-term objectives, develop a plan aligned with your life circumstances and risk tolerance, diversify, and rebalance when needed.
Overall, having a diversified investment portfolio is one of the best ways to protect yourself from the market’s ups and downs (and occasional crashes).
Of course, we can never be sure that we’ll be buying or selling at the “perfect”, but timing the market is tough even for pros. In fact, even most hedge funds consistently underperform the S&P 500 index.
So the next time the world feels like it’s about to fall apart, just take a deep breath. Turn off the news and notifications and check back in six to twelve months to see how things have settled.
Finally, I like to tell clients this to help them put things into perspective: if you were able to survive the chaos of the 2020 pandemic when the world was shut down, then you can survive any tariff, trade war, or whoever is sitting in the White House.
