Those of us who make our careers as fiduciary advisors are experienced at remaining dispassionate about the ups and downs of the markets. That’s because it is our job to understand that financial markets aren’t just a reflection of data or economic health – but are also a reflection of emotion. So, in a way, investing is as much about managing emotion as it is about managing money.
We often say that one of the most important aspects of advising is to help protect clients from making emotional financial mistakes from which they won’t recover. Simply, when you work as an advisor for as long as Chris and I have, you come to understand that while optimism builds slowly, fear and even panic can descend from a single headline. And the result is, at least for some people, that fear becomes the most expensive emotion of them all.
The fact is, that our brains are hardwired to react more strongly to perceived threats than they are to respond to the potential for gain, and in the modern era of the 24-hour news cycle, those perceived threats often come in the form of things such as breaking news, flashing red stock tickers, and social media pronouncements.
Why Fear Spikes When Headlines Do
The human brain is designed to protect us. When we encounter bad news—especially if it’s framed in urgent or catastrophic terms—our amygdala, the brain’s threat detection center, is instantly activated. This ancient survival mechanism triggers our fight-or-flight response, flooding our system with stress hormones like cortisol and adrenaline. These hormones narrow our focus, heighten emotional reactivity, and suppress the more rational parts of the brain – such as the prefrontal cortex – which is responsible for long-term thinking, analysis, and impulse control.
In other words, when markets slip and headlines flash, the brain becomes less capable of sound decision-making, and more likely to react emotionally. This is why many investors often panic and “sell low” at the very moment when discipline is needed the most. It’s sort of ironic when you think about it, but unless we become aware of it, the modern world has conspired to stack our very own neurological deck against us.
When Markets Drop, the Mind Races: Understanding the Psychology of Financial Stress
When the markets decline, it’s not only our portfolios that temporarily take a hit—it’s our literal sense of safety, our sense of time, and for many, our sense of control.
In those moments, investors don’t just see red on a screen—many can’t ignore their inner voice which is becoming more panicked with every point the market slides:
- “I knew I should’ve sold sooner.”
- “I can’t afford another 2008.”
- “I need to do something before it gets worse.”
These thoughts aren’t just mental noise. They’re coming from deep within the amygdala, which perceives a falling market as a threat—not just to wealth, but to security, dreams, and family plans. In other words, the brain perceives a threat to survival because money has become the primary tool for survival in today’s society. And in response to that “threat” to our well-being, our decision-making becomes reactive instead of rational.
The Desire for Control in a World That Feels Uncertain
When uncertainty surges, the brain often craves one thing above all: control.
And for many investors, the only lever they feel they can pull for relief is their portfolio. That’s why some people start trading—often frantically or impulsively—during downturns. Selling a position, shifting to cash, or making “just one small move” becomes an attempt to regain a sense of agency. But those actions are typically driven by fear and not planning or strategy.
Unfortunately, by attempting to regain control, investors all-too-frequently lock in losses, miss rebounds, and later regret the very moves that felt so necessary in the heat of the moment.
Common Psychological and Physical Reactions to Market Downturns
Mental reactions during downturns:
- Catastrophic thinking: “This time is different.”
- Shortened time horizon: “I’ll never recover if I don’t act now.”
- Loss of patience or discipline: “Why am I even investing in the first place?”
- Comparison: “Other people must have moved to cash. Why didn’t I?”
Physical symptoms:
- Muscle tightness or shortness of breath
- Sudden or extended fatigue
- Tension headaches or clenched jaw
- Digestive distress or loss of appetite
- Restlessness, pacing, or inability to sleep
These are all indications that the fight-or-flight system has taken over. And while these reactions are completely human, they’re not helpful for long-term financial decision-making.
So, what actually helps during periods of intense stress?
The key is re-engaging the prefrontal cortex—the part of the brain responsible for logic, planning, and self-control. This is where education, market history, and unbiased data become powerful tools. By slowing the brain with context and clarity—through charts, statistics, facts, and thoughtful conversations and self-talk—we can reduce both the duration and the impact of an amygdala hijack. In essence, logic and education calm emotion, and from that more rational place, better decisions are made.
Investor Behavior: A Spectrum of Motives and Reactions
Understanding different investor types helps explain why markets can swing so dramatically. When the market gets wonky, I reflect on the primary influences and their unique roles in market movements:
Pension Funds are long-term, conservative allocators of capital. Their enormous size means they rarely panic-sell, but they do rebalance and adjust asset allocations based on interest rate changes and risk models. When bonds underperform, they may reduce bond exposure and buy equities—sometimes fueling rallies. When the market becomes uncertain, they may also make a flight to bonds or hedge using the futures market which can increase short-term volatility overnight.
Hedge funds and short sellers are opportunistic speculators by nature, often capitalizing on market inefficiencies and panic. When volatility spikes, hedge funds may use leverage (credit) to magnify their trades. Short sellers, in particular, bet against declining stocks or indexes—and when fear dominates, they often profit for a brief period of time. But this dynamic can flip quickly. If the market turns upward, short sellers may be forced to buy back shares to cover their positions—known as a “short squeeze.” When too many try to exit at once and trading volume is thin, the scramble to cover can send stock prices sharply higher in a short amount of time. This, ironically, often forces short sellers to fuel the very rally they were betting against. (And good riddance!)
Options Traders—particularly large institutional ones—can move markets based on positioning alone. Market makers who sell options must hedge by buying or selling the underlying assets, which creates feedback loops. If too many “puts” are bought and then expire as worthless, that unwind can drive upward momentum. (The months of March and April of this year have seen record high options activity—contributing to sharper swings in both directions.)
Long-Term Investors are who provide ballast in choppy seas. They tend to ignore day-to-day noise and focus on compounding returns over years and decades. While they may not cause the short-term movements, their steady behavior is what ultimately defines long-term trends. As an aside, while many people claim to be long-term investors, research shows that only a small percentage of individuals truly invest with a 5+ year mindset. A majority spend their investment lives reacting to headlines and not following a strategy—which is one of the reasons why coaching and a dispassionate approach guided by a professional financial advisor is so essential.
The VIX: The Market’s Fear Gauge
In our recent Market Update (April 11th), my ProsperPlan co-founder Chris Grellas, CFP®, MSFA, discussed the VIX. The VIX, or Volatility Index, measures the market’s expectations for volatility over the next 30 days, based on S&P 500 index options. It’s not a measure of what has happened, but what investors expect to happen. (Not surprisingly, the VIX is often called the “fear gauge” because spikes usually correspond with major market stress.)
The index is calculated using the implied volatility of a wide range of near-term “call and put” options (contracts betting on the future performance of the market). A rising VIX suggests that options traders expect larger daily swings in the S&P 500.
For further context:
- A VIX of 15 implies an expected daily movement within 1% up or down. This is considered “normal” volatility.
- A VIX of 30 implies that daily movements will be 2x a normal daily move up or down.
- And a VIX above 30? That means a rough ride, usually caused by panic.
Investment managers watch the VIX closely because when it spikes above 30, forward returns for the market often improve—not decline. That’s because fear is already priced in, and panic is well known for creating the best buying opportunities.
The Treasury Auction and the Flight to Risk
Earlier this month, a weak U.S. Treasury auction surprised many investors. The U.S. bond market experienced a tremor causing the yield on the 10-year Treasury note to quickly move back to 4.5% on April 9th, marking its most substantial weekly increase in over two decades. (This spike was primarily driven by weak demand in Treasury auctions, notably a $58 billion three-year note auction that saw limited buyer participation.)
Policy Reversal and Stock Market Rally
Shortly after the bond market’s moment of distress, the current administration announced a 90-day pause on most new tariffs (excluding those on China). This was widely interpreted as an effort to calm financial markets and restore investor confidence. This was a welcome pivot that soothed market fears and caused short-sellers, speculators, and hedge funds to quickly retreat as long-term investors who were hungry for great deals rushed in to purchase beaten down stocks.
Markets then “squeezed” upwards swiftly and decisively:
- The S&P 500 soared 9.5%, marking its largest single-day gain in 17 years.
- The Nasdaq surged 12.2%, its second-largest daily increase on record.
- The Treasury Auction held after the announcement showed much stronger demand than earlier in the week.
The tariff pause felt like a long-awaited nod from the administration—an acknowledgment that market anxiety had reached a meaningful level. As the noise quieted and volatility softened, investors, markets, and media exhaled together and embraced the reprieve.
Always Remember: Calm Is a Superpower
Market psychology is a dance between emotion and logic. Headlines will always stir the pot, but the underlying story of progress is quieter, steadier, and more powerful. By understanding the different forces at play—from hedge fund maneuvers to the bond market’s dominating force—and watching indicators like the VIX, experienced investment managers can better navigate the storm than most retail investors.
After 20 years of walking clients through major market swings and life transitions, I’ve learned that financial success is just as much about emotional regulation as it is about strategy. When fear hijacks the brain and markets—when the amygdala fires and the prefrontal cortex shuts down—we lose access to our best decision-making abilities. In those moments, what people crave most isn’t a clever trade or a flight into cash, it’s a sense of safety, clarity, and control.
That’s where experience and education come in. And the investors who weather these moments the best are the ones who learn to pause, stay grounded, and be okay with the discomfort.
That’s all for now.
Please know that our entire team takes a lot of pride in creating these communications for you in-house. We hope this educational content helps you feel more centered, calm, and informed. If you have any suggestions, or if you’d like to see specific topics covered, please let us know. Our aim is to educate and serve, and we can adapt just as quickly as the markets.
Your Team at ProsperPlan Wealth,
Lauren M. Williams, CFP®, CRPC®, MBA
Chris Grellas, CFP®, MSFA
Sean Harvey, Director of Financial Education
Shannon Auger, Administrative Partner
