Why Investors Make Bad Decisions in Good Plans

A sound investment plan can still produce a disappointing experience if the investor keeps changing it at the wrong time.

That is not because people are irrational all day, every day. Most of us make sensible decisions when the stakes feel normal. The trouble starts when markets move quickly, headlines become urgent and doing something feels safer than doing nothing.

I think the useful question is not, 'How do I stop feeling nervous?' It is, 'What process will I follow while I am nervous?'

The return you see is not always the return you receive

Morningstar's Mind the Gap 2026 estimated that the average dollar invested in U.S. mutual funds and ETFs earned 8.7% annually over the 10 years ended Dec. 31, 2025, compared with a 9.9% annual total return for the funds themselves.¹ The 1.2-percentage-point gap reflects the timing and size of investor purchases and sales.

That finding does not prove that every investor made a bad decision. Contributions, withdrawals and real-life cash needs all affect money-weighted returns. It does show something important: when money moves can matter almost as much as what the portfolio owns.

The portfolio is often not the real problem

Suppose a diversified portfolio declines and an investor sells because the loss feels unbearable. Six months later, the market has recovered and the investor buys back at a higher price. The funds did not fail. The decision process failed.

The opposite can happen in a strong market. A concentrated stock, a fashionable theme or a private opportunity begins to look safer because its price has been rising. The SEC's Investor.gov warns that short-term trading based on social sentiment can lead to emotional or impulsive decisions.² Excitement can change a plan just as quickly as fear.

Three signs the decision is being driven by the moment

A decision is probably being driven by the moment when it begins with a price move or headline rather than a change in the client's goals, when no written condition explains why a position should be bought, sold or resized, or when an action supposedly has to happen today even though the money is intended for a goal many years away.

None of these signs automatically makes a decision wrong. They are a reason to slow down and ask for evidence.

Build rules before you need them

Start by keeping near-term spending out of the argument. If the next two years of planned withdrawals depend on selling stocks, every market decline becomes a spending emergency. Define the client's cash needs separately and hold an appropriate reserve. That makes it easier to let long-term investments remain long term.

Next, write down the target allocation and the conditions that would trigger a rebalance. A calendar review, a percentage band around the target or a combination of the two can replace guesswork with a repeatable decision. Rebalancing does not prevent losses, but it keeps the risk level from drifting unnoticed.

The account type changes the execution. A trade inside an IRA and a sale in a taxable account do not create the same current tax result. In a taxable account, a decline may create an opportunity to realize a loss, but IRS Publication 550 explains that wash-sale rules can disallow a current loss when substantially identical securities are acquired within 30 days before or after the sale.⁴ That is exactly when a nervous investor needs the advisor and CPA working from the same trade plan.

For a major change, create a pause. Twenty-four or 48 hours is often enough to separate a genuine planning issue from a reaction. During the pause, write down what changed, the expected benefit, the tax cost, the risk of being wrong and what would cause the decision to be reversed.

Review on a schedule, not on a mood. A portfolio should be reviewed when the plan calls for it and when life changes—retirement, a business sale, inheritance, divorce, a large purchase or a change in cash flow. It does not need a full redesign every time the market produces a dramatic week.

Change the strategy when the facts change. Sometimes selling is appropriate. A goal moved closer. A position became too concentrated. Tax circumstances changed. The client's ability to take risk declined. Those are planning facts. 'The market feels terrible' is an experience, not an investment policy.

A hypothetical stress test

Imagine an investor who plans to retire in three years and becomes uncomfortable after a 15% market decline. The first question should not be whether to sell everything. It should be whether the decline exposed a flaw: Was too much of the first several years of retirement spending invested aggressively? Did one stock become too large? Has the retirement date changed?

If the plan already includes adequate near-term reserves and a diversified allocation built for that horizon, the discomfort may not require a portfolio change. If the plan assumed more risk than the household can actually live with, that is useful information—but the adjustment should be deliberate, tax-aware and sized to the real problem.

The advisor's job is partly behavioral

Good advice is not limited to selecting investments. It includes creating a process that still works when the client is worried, excited or distracted. Vanguard's discussion of staying the course makes the same practical point: discipline is difficult precisely when it is most valuable.³

You do not need to remove emotion from investing. You need to keep emotion from becoming the only vote in the room. Write the rules while conditions are calm, keep the short-term cash separate and let changes in the plan—not changes in the weather—drive the portfolio.