The Costly Investor Trap That Never Dies

When the stock market is climbing, most individual investors proudly declare themselves long-term thinkers. They say they’re true investors, focused on the fundamentals of businesses, staying diversified, and committed to all the rational strategies that make the most sense. But then something strange happens — even to people you’d consider smart and educated.

As soon as a normal correction hits and the headlines turn grim, all that rationality gets tossed out the window. Suddenly, these formerly level-headed investors transform into “skilled market timers.” They convince themselves they possess the rare ability to do one of the toughest things on the planet: forecast and successfully time the market.

The Biggest Challenge Investors Face Could Be Happening Again

I’ll be honest — it’s one of the most frustrating challenges a wealth advisor faces. And trust me, it doesn’t matter how “sophisticated” your clients are, a certain percentage of clients will always succumb to that primal fight-or-flight instinct and will try to market time. 

For instance, look at today: the stock market’s had a solid run, many companies became overvalued, and now we’re in a correction. Add in geopolitical headlines — like the Ukraine conflict, the Israeli situation, and political squabbles — and you’ve got the spark that ignited this latest decline.

Generals, Soldiers and the Catalyst

That’s usually how it plays out. You get a big run-up in stock prices, especially in the largest, most widely held companies — think Nvidia NVDA, Apple AAPL, Microsoft MSFT, Google GOOGL, Amazon AMZN, Meta META and Tesla TSLA and other big tech names today. Analysts who are just observing and crunching numbers start sounding the alarm saying: “Uh, excuse me, the market’s looking pricey right now… especially in this handful of stocks.” 

I remember learning about this when I first studied technical analysis and market behavior. Back in the day, market gurus would say, “The soldiers aren’t following the generals.” When the generals lose momentum, the whole market’s in for short-term trouble. Nothing’s different now.

The Wisdom of a Market Wizard Keeps You Winning

As a wealth advisor, you have to stay sane and navigate these periods. One idea that’s stuck with me came from a conversation with Tom Basso — you might know him as one of the Market Wizards from Jack Schwager’s famous book. I had the chance to interview him a couple of times on my podcast. He told me, “My job is to stay even-keeled. When everything around you is negative, lift yourself up with a positive attitude. And when everything’s rosy, the markets are in your favor, and you feel invincible, bring yourself back down from those lofty, exuberant heights.” 

Corrections and pullbacks are normal. Embracing this mindset leads to a happier life as a money manager.

Switching to Poor Returning Assets and Spending Kills a Financial Plan

Now, as wealth advisors, we have to deal with clients’ emotional swings and the life changes that come with market ups and downs. You’ll notice a pattern: when the market’s rallying and account values are rising, people somehow find more money to invest. But when the market drops, they suddenly “need” money to buy things. 

They take chips off the table, sometimes even spending the cash, and other times people invest in other "safe" investments and wind up earning a poor return in the long term. This is the exact opposite of what they should be doing and it's the wealth advisor's job to help them avoid the trap.

It's your job to avoid the trap and focus capital based on fundamentals and valuation.

Spend all of your energy knowing what you own for clients, eat your own cooking, buy solid opportunities based on fundamentals and look to buy at prices that are likely to achieve above-average rates of return over the long term.  

Don't Get Bored By Wisdom Everyone Knows Works — Embrace It

So how do you handle this? Education is the first step when onboarding a new client. No matter how smart you think they are, you must discuss their risk profile and how they might feel when markets falter. In my case, I try to redirect clients’ focus to what really matters in investing: the value of an investment is the present value of its cash flows, discounted at a reasonable rate. If we keep our attention here, we’ll come out ahead. 

The market will overshoot and undershoot intrinsic value — it always does. The smartest, most business-like approach is to invest more when the internal rate of return looks promising and to buy companies you can own long-term at reasonable prices. 

Don’t let market swings dictate your actions unless one of two things happens: 1) the market offers you a great business at a great price, or 2) the market goes nuts and offers an exorbitant price to trim your holdings. Otherwise, focus on tracking the business’s progress and its intrinsic value.

The Enormous Costs of Not Heeding to This Advice

This lesson bears repeating in the world of investing and wealth management. If you’re new to the advisory business, you must be prepared to handle this over and over, or you’ll wash out. I’ve seen it time and again: clients you’d never expect to fall into this trap do exactly that. Anticipate it, plan for it, and do everything you can to curb this behavior. A big part of your job is coaching people through these moments so they don’t abandon a solid long-term plan for short-term fears. The cost of that mistake is enormous.

Why is the cost so high? Because investors who fall into this trap sell at the wrong time. Everyone knows this, yet it still happens. Recovering from these missteps is tough, especially over the long haul. If an investor sells out, the market rallies, and they’re left behind, they’ll lag. If they do it more than once, their wealth over 10, 20, or 30 years will be significantly lower — potentially jeopardizing retirement plans or leaving less for their kids and grandkids.

Woulda, Coulda, Shoulda Is Not an Investment Strategy

A steady pace in investing is key. I remember talking to my brother-in-law about cycling. He loves riding his bike on epic trips, like from Canada to Mexico on the Great Divide. He told me that on those rides, you naturally hit hills — up and down. The trick is keeping your effort constant at a sustainable level. You might go slower uphill, but you’ll speed up downhill, maintaining energy to finish the race.

Investing’s the same. You should only take on the risk you can endure long-term. Others might seem to zoom past you at times, but many will burn out, drop off, or finish near the back. Stick to your pace, and you’ll finish strong. 

That’s the message we wealth advisors must drill into our clients: stay in the game, invest rationally, and balance fundamentals with diversification. There’s no magic — just hard work, persistence, and a willingness to repeatedly remind clients that these principles will keep them winning over the long run.

Let me know your thoughts on handling the market’s ups and downs. And please share and follow me for more if you like this content.