Fear, Loss Aversion and Time Horizon

Fear, Loss Aversion and Time Horizon

Why does it hurt more to lose? The answer lies in loss aversion, a concept backed by behavioral finance research showing that people feel losses more intensely than equivalent gains. In other words, a 10% drop feels worse than a 10% gain feels good.

In our view, that is why many investors feel worse about the year-to-date decline in the S&P 500 index of 8.47% than the 2024 gain of 25%, or its over 80% gain since the start of 2020,  a time-

frame that includes the Covid related sell off.

The Tariff Tantrum: A Trigger for Loss Aversion

Recent market volatility driven by uncertainty around Trump’s tariff strategy is a textbook example of how fear takes hold. Headlines fixate on worst-case scenarios, 145% tariffs on Chinese goods and rising 10-year Treasury yields, because that’s what loss aversion pulls us toward. In that mindset, it’s easy to ignore the potential for de-escalation.

Zooming Out to Regain Perspective

During the COVID crash, the S&P 500 fell more than 30% from January to late March 2020. By year-end, it was up 18.39%. That kind of snapback isn’t always the norm, but it highlights how emotional decisions during downturns can prove costly.

Taking a longer timeframe: someone who invested just before Lehman Brothers collapsed in September 2008 would have had to wait until November 2010 to break even. That’s more than two years. But again, those who stayed invested recovered and eventually participated in a historic bull run. Those who extended their time horizon and put capital to work did better.

In either case however, selling in fear after market declines turned out to be a poor investment decision over a longer-term period.

Are You Actually Investing for the Long-Term?

It’s easy to say you're a long-term investor. But volatile markets are where that commitment is tested.

While the S&P is down 8.47% year-to-date, many companies have declined much further, some of which align closely with our RAM philosophy: strong financial position, long-term growth potential, and attractive valuations.

This is where time horizon and planning matter most. We encourage investors to:

1.       Have a financial plan that includes cash to cover at least 12 months of obligations.

2.       Avoid emotional trading tied to market swings.

3.       Stay opportunistic when good companies trade at compelling valuations.

What We See Today

We believe this is one of those moments where dislocation creates opportunity. Across sectors, we see businesses that are well-positioned not just to endure the current environment, but to emerge stronger over the next 2–3 years.

Loss aversion may never go away, but with the right mindset and strategy, it doesn’t have to define your investment outcomes.

Disclaimer: This content is for informational purposes only and is not a recommendation or advice. Investments and strategies mentioned are not suitable for all investors. Opinions are based on current market conditions and are subject to change. No one can predict or project performance, and forward-looking statements are not guarantees. Past performance is not indicative of future results. Investing involves risk, including the potential loss of principal.