Stock market gains over the past few years have been good news for investors working toward their financial goals. However, these strong recent results can sometimes create expectations that aren’t realistic over the long term. This matters because successful investing happens during all types of market conditions—both when markets are rising and when they’re falling. Beyond finding good investment opportunities and managing risk, it’s equally important to set realistic expectations based on historical patterns, careful analysis, and personalized financial plans.
Behavioral finance is the area of study that examines how people think and feel about investing. More than 50 years of research shows that people often make decisions based on mental shortcuts and emotions that can lead to poor outcomes. While investors can’t control what happens in the markets, the economy, or government policy, they can control how they respond to events and news headlines.
Learning about these common thinking patterns isn’t just theoretical—it’s a useful skill that helps with making better decisions. The truth is that everyone experiences these thinking patterns, regardless of how smart or educated they are. What makes some long-term investors more successful isn’t that they eliminate these patterns completely, but that they follow plans and strategies that help them make good decisions despite these patterns.
Look at the full picture, not just what happened recently
It’s normal for investors to make decisions based on recent events, since these are what we hear about most in the news. This pattern is called recency bias, which becomes a problem when we focus too much on recent events and ignore long-term historical facts. In other words, it’s thinking that “this time is different” based on only a small amount of recent information.
The S&P 500 (a measure of 500 large U.S. companies) had gains of more than 10% in six of the past seven years. After seeing this, investors might start thinking this is typical instead of unusually good. This can create two problems: either expecting these gains to keep happening indefinitely, or believing that a market decline must be coming simply because markets have done well recently.
History shows the situation is more complex. The chart shows that while the S&P 500 has averaged more than 10% gains per year over long periods, results in individual years can be very different. The recent streak of strong years has happened before in market history, but it doesn’t tell us what will happen in the future. Instead of trying to predict what will happen in any given year based only on the past few years, successful long-term investing means benefiting from the general upward pattern over time.
Recency bias becomes even more challenging when combined with another pattern called “herd mentality.” When markets are going up, the fear of missing out can push investors to abandon their carefully made plans. They might invest more in stocks than is appropriate for them, chase popular sectors like artificial intelligence and technology, or take on more risk than they should. History shows that investor emotions change frequently, so it’s important not to get swept up in any particular wave of emotion.
The answer to these thinking patterns isn’t to ignore recent performance, but to look at it in the context of long-term history. Strong returns are positive and should prompt a review of your portfolio to make sure your investments still match your long-term goals.
Think about gains and losses based on facts, not feelings
Another thinking pattern that matters today is that investors don’t experience investment gains and losses in a purely factual way. The long history of the stock market demonstrates this clearly. When looking at the S&P 500 over many decades, stock market declines happen from time to time but are smaller than the long-term upward movement of the market. However, in the moment when they happen, these declines can create strong emotional reactions.
Daniel Kahneman and Amos Tversky, two researchers whose work created the foundation of behavioral science, found that “losses loom larger than gains.” This describes loss aversion, which means people feel the pain of losing money more intensely than the happiness of gaining a similar amount. For example, imagine gaining $100 and how good that might feel. Now, compare that to losing $100 of your money and how that might affect your mood. For many people, the feeling from the loss is stronger and influences future decisions more.
This matters because reaching financial goals requires staying invested and sticking to your plan through both good times and bad times. The chart above shows that even though the stock market has gone up in two-thirds of years, it often experiences significant declines during the year before recovering. Last year’s volatility related to tariffs is a clear example. Those who sold their investments too quickly, or near the lowest point, would have missed the recovery that pushed markets to new record highs.
Look at opportunities in different types of investments and regions
In today’s market, home bias—the tendency for investors to invest in what they know based on where they live—has become increasingly important. One version of this, called home country bias, is when investors put too much money in domestic (U.S.) investments even when other regions might offer good opportunities.
Over the past ten years, U.S. stocks have delivered strong returns compared to developed markets (like Europe and Japan) and emerging markets (like China and India), driven by technology companies and strong corporate profits. However, this hasn’t always been the case. In 2025, both the MSCI EAFE index (which measures developed market stocks) and the MSCI EM index (which measures emerging market stocks) performed better than U.S. stocks. While we can’t guarantee this pattern will continue, it shows the importance of investing across different types of investments and regions.
History shows that which investments perform best changes over time and is difficult to predict. As the chart above shows, international markets currently have lower valuations (meaning they’re less expensive relative to company earnings) than U.S. stocks, which can help improve the balance of risk and potential returns in portfolios. Ultimately, successful investing isn’t about getting the highest returns in any single time period, but about creating more stable results over complete market cycles.
The bottom line? After several years of strong market performance, it’s important for investors to keep realistic expectations. History shows that the stock market has supported long-term portfolio growth, but this requires investors to manage emotional responses to short-term events.
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