Fear vs Greed in Investing

What is it?

Fear and greed are the two emotions that drive most bad investing decisions. Greed pushes investors to pile into a fund or sector after it has already risen sharply, chasing returns that have largely already happened. Fear pushes them to sell everything the moment markets fall, locking in losses that would have recovered if left alone. Both emotions push you to act at exactly the wrong time.

Why should you care?

Markets move in cycles, but emotions don't move on a schedule that matches them — greed peaks near market tops, and fear peaks near market bottoms. An investor who buys when everyone is euphoric and sells when everyone is panicking systematically buys high and sells low, the opposite of what builds wealth. Recognising which emotion is driving a decision is the first step to overriding it.

Real-life example

In early 2020, as COVID-19 fears spread, many investors redeemed their equity mutual funds near the market bottom in March 2020, driven by fear. The Nifty 50 fell nearly 38% from January to March 2020, but then rallied over 80% from that low by year-end. Investors who sold in panic locked in losses; investors who held on — or even continued their SIPs — recovered fully and gained. The same pattern repeated in reverse in late 2021, when greed drove many investors to pile into smallcap funds after a huge run-up, right before a sharp correction in 2022.

Common mistakes

• Increasing investments only after a fund has already delivered strong recent returns, effectively buying at a higher price than earlier investors.
• Redeeming investments during a market fall out of fear, converting a temporary paper loss into a permanent realised loss.
• Mistaking a rising market for a safe market — markets are often riskiest (most overvalued) exactly when greed is highest.

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