Investing often goes against our natural instincts, pushing us toward emotional and irrational decisions. For instance, if you invest $5,000 and see your portfolio gain $800 or even $1,200, the temptation to cash out and secure those profits can be overwhelming, driven by the fear of losing your gains. Conversely, when faced with losses—say your investment drops by $1,500—you may hesitate to sell. Instead of cutting your losses, you might hold on, hoping for a recovery, or even buy more to “average down,” believing the market will turn in your favor.

This behavior, fueled by greed for greater returns and an unwillingness to accept losses, can trap investors in a damaging cycle. Selling at a loss feels like admitting failure, making it psychologically difficult to act rationally. Ironically, this hesitation often leads to greater losses or liquidation when the market moves further against expectations.

To succeed, investors must overcome these emotional tendencies. Acknowledging that small losses are a normal part of the process and managing risk effectively are crucial steps to avoiding significant financial damage.