Fear and Greed The Two Enemies of Long Term Wealth

January 17, 2026

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When it comes to investing, fear and greed are the two most powerful emotions that move investors and, often, the markets themselves. Each emotion clouds our ability to make rational, well-thought-out decisions. In fact, emotions can also easily become our worst enemies. Feelings of fear and greed override logic, push investors toward impulsive actions, and lead to costly mistakes. If these decisions are repeated often enough, they can significantly impact real-life wealth.

As we move into the first half of 2026, amid constant market headlines, global uncertainty, and social media-driven stock tips, it is the right moment to pause, step back from the noise, and focus on what truly matters for long-term wealth creation – discipline, patience, and emotional control.

Why People Make Bad Financial Decisions Based on Fear

Fear-driven decisions are rooted in psychology, not logic. One key reason is loss aversion, the tendency to feel the pain of losses more intensely than the pleasure of gains. A temporary decline feels unbearable, even if the long-term outlook remains intact.

Another factor is herd mentality. When everyone around us is selling or predicting doom, it feels safer to follow the crowd. In India, where market discussions are heavily influenced by social media, WhatsApp forwards, and television debates, fear spreads quickly and amplifies panic.

Finally, fear thrives in the absence of a clear investment plan. Investors who do not fully understand why they invested in the first place are far more likely to exit when volatility increases.

Why People Make Bad Financial Decisions Based on Greed

Greed usually takes over during rising markets. When indices are hitting new highs, and certain stocks or sectors are delivering extraordinary returns, investors begin to believe that the trend will continue indefinitely.

This leads to return-chasing behaviour, where money flows into assets after they have already performed well.

Indian markets have repeatedly seen this during small-cap rallies, IPO booms, and thematic trends. Buying at high valuations may feel exciting in the moment, but it significantly lowers future return potential.

Greed is also fueled by FOMO (Fear of Missing Out). Seeing friends, influencers, or online communities discuss quick profits creates pressure to participate, even when the investment does not align with one's financial situation or risk tolerance.

To manage these emotional extremes without reacting impulsively, investors must first understand their own risk profile.

The Importance of Risk Profile in Managing Emotions

The process of determining the degree of risk that is ideal for a person, for example, you as an investor, is known as risk profiling. The best way to understand your own risk appetite is to consider how much risk you are willing to accept, how much risk you can afford, and how much risk you will need to take to reach your financial objectives. Below are some of the reasons why risk profiling should be done before starting an investment journey:

1. Aligns investments with life stage and responsibilities

A person in their 20s with fewer financial responsibilities can tolerate market ups and downs better than someone nearing retirement. Knowing your risk profile ensures investments match your age, income stability, family commitments, and long-term goals, reducing emotional stress during volatility.

2. Prevents panic during market corrections

When investors clearly understand how much risk they can handle, temporary market declines feel expected rather than alarming. This awareness helps avoid panic selling during corrections and allows investors to stay invested, giving their portfolio enough time to recover and grow.

3. Controls overconfidence during bull markets

A defined risk profile acts as a guardrail during rising markets. It prevents investors from over-allocating to equities or chasing trending stocks just because markets are performing well, thereby reducing the risk of heavy losses when market sentiment reverses.

4. Encourages disciplined asset allocation

Understanding risk tolerance helps investors maintain a balanced mix of equity, debt, and other assets. This balance smoothens returns over time, lowers portfolio volatility, and keeps emotions in check when one asset class underperforms temporarily.

5. Supports long-term wealth-building behaviour

When investments are aligned with risk capacity, investors are more likely to remain consistent with SIPs and long-term plans. This consistency reduces emotional decision-making and allows compounding to work effectively, which is essential for achieving long-term financial goals.

How to Avoid Making Bad Financial Decisions Based on Fear and Greed

Understanding your risk profile is one of the most effective ways to manage both fear and greed. Regulatory bodies also consistently emphasise that investments should align with an investor’s risk capacity and financial goals.

1. Set rules over reactions: Many disciplined investors document personal investment rules in advance, such as limiting how much of the portfolio can be sold during a market fall. These self-defined boundaries often help prevent emotional decisions. Such rules are typically reviewed periodically and treated as part of a long-term family financial framework.

2. Using automated investing routes: An investor should prefer systematic investment plans (SIPs) in broad-based index funds to maintain consistency. Automation allows investments to continue across market cycles, reducing the influence of short-term fear or greed on decision-making.

3. Ignore the noise: Leave WhatsApp groups that give stock tips. Turn off TV news channels. Choose a limited number of reliable information sources and review portfolios at defined intervals instead of tracking daily movements.

4. Maintaining an emergency buffer: Save 6 to 12 months of your family expenses in a safe bank account or liquid fund. Use it only for real emergencies, not market falls. This stops you from selling investments in fear.

5. Periodic portfolio review and rebalancing: Regular portfolio reviews, often done quarterly or annually, help investors realign their asset allocation with their original risk profile. This process is generally rule-based rather than emotion-driven.

6. Keeping a long-term perspective: Market cycles include both ups and downs. Investors who focus on long-term goals, such as education or retirement planning, often find it easier to remain patient during short-term volatility.

Fear and greed will always be part of investing, but they do not have to dictate outcomes. Investors who understand their risk profile, follow a clear plan, and stay disciplined can rise above emotional traps. Over time, patience, consistency, and rational decision-making matter far more than reacting to short-term market movements. If you want clarity before taking your next investment decision, start by knowing your risk profile. You can book a one-on-one consultation with a certified financial advisor for personalised guidance.

-Sukalyan Halder & Nini Prasad

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FILED UNDER: Stock Market

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Fear and Greed The Two Enemies of Long Term Wealth

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