Market turmoil can make even the most seasoned investors second-guess their strategy. I've spent decades helping clients navigate market cycles, and one of the most common and costly mistakes I see is what behavioral finance calls the “snake bite effect.”
After experiencing a significant loss in a specific stock or sector, an investor becomes excessively risk averse — much like someone bitten by a snake who then fears all tall grass. The pain of the past loss distorts future decision-making.
Instead of assessing opportunities rationally, they avoid anything that resembles the investment that caused the pain.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
This emotional overcorrection leads them to adopt an overly conservative strategy, often missing out on future gains and compounding the setback.
The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.
The pain lingers: Missing out on recovery and diversification
Remember the burst of the tech bubble? That was over two decades ago, and yet I still have clients who wince at the thought of investing in steadily performing tech stocks such as the Magnificent 7.
The pain lingers long after the bite, and this overcorrection leads them to miss out on two critical things in their portfolio: recovery and diversification.
Recovery. Staying on the sidelines out of fear can do more harm than the one-time loss. For example, during the 2008 financial crisis, investors who sold at the bottom locked in steep losses.
Those who stayed invested watched their portfolios recover — and then grow to new highs. The COVID-19 crash in early 2020 was another example. Many fled the market, only to miss out on one of the fastest recoveries in history.
Diversification. A thoughtful, well-diversified portfolio is a fundamental investment strategy. It helps cushion the blow of downturns while positioning the portfolio for long-term growth.
If a fearful investor is avoiding a specific sector or asset class indiscriminately, they are missing out on what a fully diversified portfolio offers them: managing risk and capturing opportunities.
Five strategies to withstand a bite during market volatility
Set aside emotions and stick to your plan. A well-constructed financial plan anticipates volatility. If your financial needs and long-term goals haven’t changed, your portfolio probably doesn’t need to either.
Use the bite for tax-loss harvesting. A silver lining in a down market is using realized capital losses to offset capital gains elsewhere in your portfolio, helping reduce your tax liability.
Rebalance, don’t retreat. Use downturns to realign your portfolio. That might mean trimming winners and buying undervalued positions — not fleeing entirely.
Keep cash for liquidity, not market timing. Cash is crucial for emergencies, but using it to time the market is rarely successful. History shows the best days often follow the worst.
Focus on long-term growth. Investing isn’t about dodging every downturn — it’s about staying invested through them. Compound growth rewards patience.
The antidote: Overcoming the snake bite effect
It’s natural to fear another painful loss — but avoiding future risk altogether can do more damage.
The key to overcoming the snake bite effect is recognizing it for what it is: a deeply emotional response to loss. That response can lead to irrational conservatism, missed opportunities and a portfolio that no longer aligns with your goals or risk profile.
Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.
The antidote is a steady, diversified approach backed by discipline and a long-term perspective.
Markets will always carry risk, but history favors those who stay invested. Don’t let one bad experience shape your entire investment future. Learn from it, plan around it, and most importantly — don’t let fear be your financial adviser.
Related Content
- 8 Facts You Need to Know About Stock Market Corrections
- How Tax-Loss Harvesting Helps to Lower Your Tax Bill
- Financial Pitfalls to Avoid in Your 30s, 40s and 50s
- Keep Your Feelings Out of Your Finances: Here's How
- Where to Invest in an Uncertain Market
-
Dow Adds 646 Points, Hits New Highs: Stock Market TodayIt was "boom" for the Dow but "bust" for the Nasdaq following a December Fed meeting that was less hawkish than expected.
-
5 Types of Gifts the IRS Won’t Tax: Even If They’re BigGift Tax Several categories of gifts don’t count toward annual gift tax limits. Here's what you need to know.
-
The 'Scrooge' Strategy: How to Turn Your Old Junk Into a Tax DeductionTax Deductions We break down the IRS rules for non-cash charitable contributions. Plus, here's a handy checklist before you donate to charity this year.
-
Dow Adds 646 Points, Hits New Highs: Stock Market Today
It was "boom" for the Dow but "bust" for the Nasdaq following a December Fed meeting that was less hawkish than expected.
-
What You Need to Do With Your 401(k) Before 2025 Is OverBefore 2025 ends, check your 401(k) contributions, investments, and catch-up eligibility to lock in this year’s tax savings and employer match.
-
I'm a Tax Attorney: These Are the Year-End Tax Moves You Can't Afford to MissDon't miss out on this prime time to maximize contributions to your retirement accounts, do Roth conversions and capture investment gains.
-
I'm an Investment Adviser: This Is the Tax Diversification Strategy You Need for Your Retirement IncomeSpreading savings across three "tax buckets" — pretax, Roth and taxable — can help give retirees the flexibility to control when and how much taxes they pay.
-
Dow Rises 497 Points on December Rate Cut: Stock Market TodayThe basic questions for market participants and policymakers remain the same after a widely expected Fed rate cut.
-
I'm Retired With $2.2 Million Saved and Work 2 Retail Shifts a Week for Fun. My Young Colleague Just Got Her Hours Cut. Should I Quit So She Can Have My Shifts?Should she quit her job so a struggling young colleague can take her shifts? We asked certified financial planners for advice.
-
Could an Annuity Be Your Retirement Safety Net? 4 Key ConsiderationsMore people are considering annuities to achieve tax-deferred growth and guaranteed income, but deciding if they are right for you depends on these key factors.
-
I'm a Financial Pro: Older Taxpayers Really Won't Want to Miss Out on This Hefty (Temporary) Tax BreakIf you're age 65 or older, you can claim a "bonus" tax deduction of up to $6,000 through 2028 that can be stacked on top of other deductions.
