April: A Time to Reflect on Financial Literacy and Investing Discipline

The Office of the Comptroller of the Currency (OCC) designates April as National Financial Literacy Month—a time to highlight the importance of increasing consumer knowledge and skills to build and maintain sound financial choices. For stock market investors, April 2025 has been a true emotional rollercoaster, with dramatic shifts between fear and euphoria occurring within just days.

In the spirit of National Financial Literacy Month – and considering recent market turbulence – Ironwood Wealth Management encourages investors to stay focused on the fundamentals and adhere to a disciplined investment approach.

Emotions and Investing: A Complex Relationship

It’s human nature to struggle with separating emotions from financial decisions. Yet when investment choices are driven by emotion rather than logic, the consequences can be damaging to long-term performance. Fear and greed are powerful forces that can lead to poor timing, buying high and selling low. Panic selling during market drops and return-chasing during rallies are missteps that have the potential to derail even the best-laid plans. Ironically, emotionally driven selling can occur just as markets are poised for recovery and future gains.

Overcoming Behavioral Biases

While avoiding emotionally driven decisions is no easy task, understanding common behavioral biases in finance can help investors become more self-aware and less reactive. We explore the following behavioral biases and the practical investment management tips we believe may help overcome them.

 

1. Loss Aversion

Loss aversion refers to the tendency to feel the pain of losses more acutely than the pleasure of equivalent gains. This cognitive bias can lead to overly conservative portfolios or premature selling during market downturns.

Common Pitfalls:

  • Overly conservative allocations may not provide the growth needed to meet long-term goals.
  • Impulsive selling during market dips in an attempt to avoid further losses can lead to locking in losses rather than avoiding them.
  • Market timing gone wrong: Investors intending to reinvest once the market stabilizes may have already missed the rebound.

Investment Management Tips:

  • Avoid market timing: If you have an emergency fund and no immediate need for portfolio assets, you may want to resist shifting long-term investments into cash.
  • Challenge the “this time is different” mindset: Each downturn can have unique triggers, but markets have the ability to recover.
  • Understand market cycles: Major up-days can occur near major down-days—missing them can significantly impact long-term returns.
  • Pause before acting: Giving yourself time before selling can help avoid rash decisions and allow markets time to recover.

 

2. Herd Mentality

Herd mentality occurs when investors mimic the actions of others, assuming the crowd knows best. This behavior can lead to irrational rallies and sell-offs disconnected from fundamentals.

Investment Management Tips:

  • Resist FOMO (Fear of Missing Out): Seeing others succeed can trigger impulsive investment decisions. To help combat this, focus on your personal financial journey and limit exposure to hype—especially on social media.
  • Stick to your plan: Rather than chase trends, focus on a well-thought-out strategy based on your unique goals.
  • Diversify: Spreading investments across asset classes can reduce the temptation to follow the crowd based on one asset’s performance.
  • Do your research: Make decisions based on solid analysis rather than peer pressure or media buzz.
  • Talk with a financial advisor: A professional can provide objective feedback and help cut through the noise.

 

3. Confirmation Bias

Confirmation bias is the tendency to seek out information that supports our existing beliefs while ignoring contradictory data. In investing, this can result in one-sided views and poor decision-making.

Example: An investor may focus only on positive news about a favored stock while disregarding warning signs.

Investment Management Tips:

  • Acknowledge the bias: Recognizing that we all have cognitive biases is the first step toward overcoming them.
  • Seek opposing viewpoints: Actively explore credible sources that challenge your assumptions to gain a fuller understanding.

 

4. Political Bias

Warren Buffett once said, “If you mix your politics with your investment decisions, you’re making a big mistake.” In today’s divided political climate, strong emotions can cloud investment judgment.

Historical Perspective:
The S&P 500 Index tends to be relatively unaffected by which political party is in power. For example, if you invested $1,000 in the S&P 500 on January 1, 1953, and held it through December 31, 2023:

  • That investment would have grown to about $27,400 if you were only in the market during Republican administrations.
  • It would have reached around $61,800 if invested only during Democratic presidencies.
  • But if you had stayed invested the entire time—regardless of which party was in office—your $10,000 would have grown to approximately $1.7 million.

Source: Bespoke Investment Group – Data as of May 30, 2024

The key takeaway? We believe time in the market beats timing the market, no matter who’s in the White House.

Investment Management Tips:

  • Focus on long-term trends: The market’s performance over time reflects broad economic forces more than political leadership.
  • Engage in open discussions: Talking with people who have different political views can broaden your perspective and enhance your investment reasoning.

Final Thoughts

Market volatility is inevitable—but panic doesn’t have to be. By understanding emotional triggers and behavioral biases, and staying committed to a long-term plan, we believe investors can better navigate uncertainty. Financial literacy is more than knowledge – it’s about applying that knowledge with discipline, especially when it’s hardest to do so.

Let Ironwood Wealth Management help you stay grounded, informed, and confident in your financial future.