Josh Strange is the Founder & President of Good Life Financial Advisors of NOVA. The firm works with federal employees and contractors.
Many people today pay close attention to interest rate policy. Perhaps too close.
The reason they do, of course, is that the Federal Reserve added a ton of fuel to the most recent bull market. When capital is easier to come by—as is the case when rates come down—the valuations of firms that rely on debt to finance operations tend to go up.
That’s how scores of tech companies operate, which is, in part, what allowed the equity markets to do so well over the last two years. The S&P 500 advanced by more than 20% in both 2023 and 2024, while the Nasdaq did even better over the same stretch.
The issue, though, is that sometimes investors hear, “Interest rates are coming down,” and then make all sorts of assumptions about mortgages, credit cards and other types of loans.
The same is true for bonds.
However, as some have found, the Fed can lower rates consistently for 18 months, yet buying a house may not get any cheaper—nor will financing a loan to start a business.
The confusion hints at a larger issue: Every day, people make consequential financial decisions based on bad information, misjudgments, emotion or all of the above. Here are some common examples I frequently see in my practice.
1. Recency Bias
For better or worse, people remember the recent past best, not historical trends.
This helps explain why millions of investors, especially those under 35, have an aversion to bonds—investments that have largely underperformed in recent years. It’s hard to blame them. If bonds have done nothing but decline in value, why invest in them?
But recency bias clouds a crucial truth: Market cycles don’t last forever. Bonds have been battered. But if inflation moderates further and the Fed begins to cut rates again, they could bounce back, particularly if economic growth slows and riskier assets take a hit.
2. Endowment Bias
If it’s worked for me before, why change? Right?
That’s the mindset of investors who fall victim to endowment bias—a tendency to favor what’s familiar over what’s optimal. While routines in life provide comfort and predictability, investing requires adaptation.
A great example? The classic 60/40 portfolio—60% stocks, 40% bonds—was considered a near-perfect asset allocation for decades. But investors who stuck to it rigidly in the last five years likely lagged behind those who adjusted to market realities.
Now, consider tech stocks. Over the past decade, they’ve been pretty dominant. But history shows that sector leadership rotates, and those with an unwavering tech bias may find themselves on the wrong side of the next cycle.
The best investment strategies aren’t set in stone. They evolve based on data, trends and economic conditions. The lesson? Be flexible, even if it means letting go of past successes.
3. Loss Aversion
Nobody likes to lose money. And no advisor wants their clients to experience losses. But here’s the problem: Many investors have goals they will never reach if they don’t take some degree of risk.
Loss aversion—the tendency to fear losses more than we value gains—keeps people on the sidelines when they should be investing or leads them to overly conservative allocations. While being cautious is prudent, there’s a big difference between managing risk and avoiding it altogether.
The role of a good advisor is to help you appreciate that delicate dynamic—and overcome it. By setting realistic expectations and constructing a portfolio through deliberate risk, investors can experience returns over the long run without undue stress.
4. The Fear Of Missing Out
Few things trigger an emotional reaction quite like seeing an asset skyrocket in value—especially if you missed out. This phenomenon, known as FOMO (fear of missing out), has led countless investors to chase performance instead of making sound, strategic decisions.
We saw it happen during the pandemic. Meme stocks, cryptocurrencies and speculative assets soared as retail investors piled in, hoping for quick profits. Some made fortunes—many more lost everything.
It happened again near the presidential election when bitcoin took off. At the start of November, it was in the $70,000 range. Once it became clear that President Donald Trump, whose policies were perceived to be crypto-friendly, would emerge victorious, bitcoin skyrocketed in value, eventually eclipsing $100,000 about a month later.
Sounds great. The problem is that chasing momentum isn’t an investment strategy—it’s a gamble. And like gambling, it sometimes pays off, but over time, the house wins.
Emotional Control In Investing Is Key
Investing is an emotional exercise. And anytime emotions come to the fore, people tend to do things they regret. If that happens too many times, the damage could eventually be too much to overcome.
That’s where a good advisor is worth their weight in gold. They can’t eliminate emotion. However, they can allow you to appreciate what you’re feeling and help you act—or don’t act—accordingly.
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