How to Apply the Psychology of Investor Behavior

In early 2025, we find ourselves in a familiar place. Several major indices have recently entered correction or bear market territory, and investor anxiety is once again on the rise. For financial advisors working with retirees, these moments bring a familiar tension: How do you keep clients from abandoning their long-term investment plans in the face of short-term fear?

That question drove my research into investor behavior during market volatility. I analyzed a nationally representative sample of older investors using Health and Retirement Study data collected during the COVID-driven bear market in 2020. What I found confirms what many advisors have seen firsthand—and it also points to a practical solution.

The Hidden Risk: Sequence of Returns

One of the greatest threats to retirement success is not a market crash. It’s what a retiree does in response.

When investors reduce equity exposure during a downturn, they may feel like they’ve made a smart move. In the short term, that might even be true. They avoid further losses and experience a sense of control.

But being "short-term right" can lead to being "long-term broke." This behavior compounds the problem of sequence of return risk. For retirees who are withdrawing from their portfolios, early losses combined with reduced equity exposure mean they are less likely to recover when the market bounces back. They lock in losses, miss the recovery, and lose the potential for growth. The math of retirement doesn’t forgive that easily.

The Real Predictor: Market Outlook

Much of our industry focuses on risk tolerance and time horizon. Those are important, but they don’t tell the whole story. In this study, the strongest predictor of whether an older investor reduced stock exposure during the COVID market crash wasn’t their personality, education, or even prior asset allocation. It was how they felt about the market’s direction over the next 12 months.

Put simply, when people believed the market would go up, they stayed the course. When they believed it would go down, they bailed.

This insight matters because market outlook is not a fixed trait. It can be shaped by advisors. This gives us a lever to protect clients from their own worst instincts.

What Financial Advisors Can Do

Here are several practical ways financial advisors can use these insights in real-world practice:

1. Ask about long-term market expectations.

When the market drops, don’t just ask if clients are okay. Ask them what they think the market will be like 12 months from now. Their answer can serve as an early warning sign. A pessimistic outlook signals a higher likelihood of behavior change. It also steers the conversation to longer-term expectations instead of near-term volatility.

2. Frame volatility as normal and expected.

Remind clients that volatility is part of the plan, not a sign the plan is broken. Use historical examples to show how markets have recovered and why staying invested matters.

3. Address the illusion of control.

Moving to cash may feel safer, but it’s often just swapping one kind of risk for another. Clients need to understand that avoiding short-term losses often means losing long-term returns. This can be illustrated with financial planning software solutions.

4. Be strategic with reassurance.

Not all clients need the same level of communication. The data shows that personality plays a role: clients who are more anxious or pessimistic need more regular, personalized touchpoints during volatility. Chances are, you know who those clients are.

5. Normalize market dips as rebalancing opportunities.

Clients who follow the market more closely are less likely to reduce risk. That suggests that education and familiarity can help. Position downturns as temporary and potentially beneficial for long-term investors.

Final Thought

You can’t change someone's personality, but you can influence how they feel about the future. That’s the real takeaway for advisors.

Especially during volatility periods like we’re seeing in 2025, a client’s market outlook becomes a leading indicator of future behavior. By identifying and addressing that outlook, advisors can reduce the odds of panic-driven portfolio changes, protect long-term outcomes, and provide more than just financial value—they offer emotional stability and decision-making support when it matters most.

In the end, good advisors manage portfolios. Great advisors manage behavior.

More From The College

• Watch or listen to Shares Podcast Episode 29: Retirement Planning in Volatile Markets
• Learn more about the Retirement Income Certified Professional® (RICP®) program
• Browse other courses and programs available at The College