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.
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This emotional overcorrection leads them to adopt an overly conservative strategy, often missing out on future gains and compounding the setback.
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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.
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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.
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