Your Emotions Can Throw You Off Your Investing Game. A Vanguard Pro Explains How.

Fiona Greig, who studies investor behavior at Vanguard. (Photograph by Jonno Rattman)

The head of investor research at the fund giant outlines how early market experiences can shape investors’ risk tolerance.

For investors, fear can be the portfolio killer. It can spur them to sell assets at the wrong time—or adopt a portfolio allocation that may be too conservative for their goals.

Fiona Greig, global head of investor research and policy for Vanguard’s Investment Strategy Group, spoke with Barron’s about the relationship between investors’ emotions and their financial behavior. She explained how to overcome fears of a market crash, the importance of first experiences, and why having $2,000 in emergency savings is more important than you might think.

Barron’s: I want to start by asking about investors’ emotions and the stock market this year. In April, stocks plunged on tariff policy, but the market has since bounced back and is now at record highs. What have you seen in terms of investor behavior at Vanguard?

Fiona Greig: We were looking at how Vanguard investors traded on those days between the third and ninth of April. The market was plunging, but 92% [of investors] didn’t trade. And even among those who did trade, 77% of them were buying the dip, especially younger people. Those who were sellers tended to be older. There were probably a lot of institutional investors moving money around [at the time], but retail investors, especially Vanguard investors, were focused on controlling what they could control, tuning out the noise, and staying balanced. We often talk about staying the course, and most Vanguard investors did stay the course.

Now, for many people, managing that fear and volatility is stressful. For some of those individuals, [financial] advice could be an important option. We’ve learned that advice not only adds value in terms of the portfolio, but also in terms of taking away stress and not having to worry about one’s financial life.

What are investors fearful or worried about now?

We actually track investors’ fears every other month, specifically expected stock market returns and the perceived likelihood of a stock market “disaster”—the chance that the stock market drops by 30% or more over the coming year. It turns out, these two things move in tandem with the market itself. When the market is down, more people think a stock market disaster is imminent. We saw this very clearly in April during the tariff volatility. Fear of a stock market disaster spiked to over 11%, the highest level on record.

Yet what’s interesting is that, in reality, few investors trade in line with these expectations. During the week of April 3 to April 9, just 8% of Vanguard investors made a trade. So, by and large, investors didn’t trade as if they thought the stock market was going to fall an additional 30%.

When do emotions affect investors’ decisions?

I’ll give you two examples. First, loss aversion, meaning investors are reluctant to sell assets that have lost value. Selling activity is significantly lower among investors who have unrealized losses compared with those who broke even or experienced unrealized gains.

The second is what we term first impression bias. We see enduring effects of early market experiences. Investors who began their investment experience during down markets, such as the bursting of the dot-com bubble in the early 2000s, tend to continue to hold more conservative portfolios decades later. Investors who started investing in down market environments may miss out on excess returns, while those who started during a strong stock market may take on too much risk.

Did you see that kind of behavior from millennials who came of age during or in the wake of the financial crisis of 2008-09?

Yes. People who opened an account during the financial crisis currently have lower equity allocations. Median equity allocation for those who started [investing] during the crisis is in the low 70s [percent], whereas those who started investing in the 1990s bull market have a median equity allocation of 86%.

What’s the best way to overcome fear of a market crash and avoid investing mistakes?

Tune out the noise. You can’t control market returns, but you can control what your costs are, how much you are contributing to your retirement plan, and what your asset allocation is. When markets are roiled, you should ask if your goals and time horizon have changed. And if they haven’t, then why are you changing your asset allocation?

The other way to avoid mistakes is to farm out the asset allocation decision to a professional. It could be digital advice. There are lots of low-cost advice solutions out there. That will help you maintain your allocation.

Earlier this year, you wrote about your experience talking to your parents as they near retirement. Can you talk more about that?

My parents are part of the baby boomer generation. We’re in this silver tsunami moment. More people are retiring than ever before. It’s also a major financial moment because that generation has amassed more than $80 trillion in wealth. In some sense, this generation should be on good footing because they have amassed all that wealth, but we know that wealth is unevenly distributed. So, the question of retirement readiness is an open one. Questions you should be asking your parents are: Are you ready? Do you have enough? How do you want to spend it, and if there is any left over, what are your priorities?

My mom and dad have different goals and time horizons. My dad has balance issues. He has fallen several times. That’s a risk for him. Whereas my mom is still traveling around the world and is still supporting her mother, my grandmother, who is 102. They have different time horizons in that regard. I am fortunate in that I feel they have enough for their retirement. Vanguard does research on retirement readiness, and many people aren’t ready.

Also, as a couple gets older, women obviously tend to live longer than men. The wife has a 70% chance of outliving her husband by 10 years. That means the second survivor is often female, and when a husband dies, many women tend to fire their financial advisor. That suggests that there is another conversation to be had there around what are his goals, her goals, and how are her financial priorities reflected in the financial plan.

What holds people back from those kinds of honest conversations?

I think it comes back to values. I have three kids. I talk to them a lot about money, what we are saving for, and what trade-offs are—meaning what I am willing to spend money on and not willing to spend money on. I don’t tell them exactly what I earn or how much we’re saving or how much we’re putting aside in 529 college savings plans. Maybe I just feel they’re too young to understand what the numbers really mean. But on the other hand, maybe the rub is that if it isn’t a good time now, it therefore never becomes a good time.

And that is another thing I would impress on us all. My team has been spending time looking at cognitive decline, and it comes earlier than you may think, and it is more prevalent than you may think. The impact of cognitive decline often begins in one’s financial life. For instance, someone may fall prey to a financial scam. So, I think having these kinds of conversations are incredibly important before we experience cognitive decline.

A 2023 Vanguard research report found that while about one in three debt-free investors feel anxious about their finances, one in two investors with debt feel that way. Can you say more about that?

It’s interesting because debt is ubiquitous, and there are all kinds of debts. Mortgage debt may be a good kind of debt because it is connected with an appreciating asset. Then there is credit card debt, which has interest and maybe isn’t a good kind of debt. The question is how to live with debt, and leverage it for good financial outcomes rather than bad financial outcomes.

We are increasingly spending time on how people are making financial mistakes in terms of debt payment versus savings decisions. It’s about: What do I do with my next dollar? Have I allocated that correctly?

I’ll give you an example. We have been trying to estimate what share of people have credit card debt. Across our retirement plan participants, about 55% of them had revolving credit card debt. As it turns out, a lot of those individuals, about one in three, were contributing above and beyond the employer match to their retirement plan—say, 8% or 9% or 10%. So you can see individuals carrying high-cost credit card debt while contributing vigorously to their retirement plan.

Now, about the stress of holding debt: We were surprised at just how much having $2,000 in emergency savings does for people in terms of their financial well-being. To put it in context, it’s associated with a similar boost to financial well-being as having $1 million in financial assets. That was really striking.

There was also a time-savings component. People with $2,000 spent roughly four fewer hours a week on their financial lives than those with no savings. So, it allows people to not worry and to spend less time managing their cash.

We sometimes have thought about [saving] as a zero-sum game: If I am saving for the short term, I’m not saving for the long term. But what we are actually learning is that no, people with emergency savings are more likely to contribute to their retirement plan and less likely to cash out their retirement plan. That just goes to show that having emergency savings isn’t just good for your emotional well-being; it can also provide this buffer. And we know that many people have volatile incomes and they need a buffer to help them manage their income.

Thank you, Fiona.

Write to Andrew Welsch at andrew.welsch@barrons.com