Picture your Future. Save for it by earning 1.5% on a 1-year Term Deposit Account! Learn more.

Morningstar Insights: Inflation, Market Volatility, and Your Mind

It is important to acknowledge our biases.

As if investors needed any more calamities to deal with, rising inflation, market volatility, and recession scares have been dominating headlines and our wallets.

During times like these, many investors may feel the need to understand these occurrences and the immediate impact they can have on their finances, and there are plenty of resources on this site to help navigate this ever-evolving situation. However, as we all devour every article with the word “recession” in the title or watch every drop and rise in the market, it is important to acknowledge our biases.

Our minds tend to take shortcuts when making decisions, some of which lead us to the wrong conclusions and actions. These shortcuts may sound harmless, but they can have a drastic impact on our finances. To make things worse, today’s current market environment can further exacerbate our biases, making them even more dangerous.

Our Biases Can Make Things Worse

Our biases can arise at any time, but given today’s market environment, a few especially harmful biases can be scarcity mindset, action bias, and loss aversion.

Scarcity Mindset

A scarcity mindset occurs when we feel like we have less than we need, whether that be insufficient money, time, food, social connections, or other essentials. This feeling can prompt us to make decisions we can later regret, which can then snowball, where one bad decision made under pressure can set up the stage for another. In fact, research has found that scarcity can impact our neural mechanisms when making decisions, decreasing activity in the part of the brain that plays a role in goal-directed decision-making. Given today’s higher prices, many of us may be starting to feel the pinch in our wallets and find ourselves exhibiting a scarcity mindset.

Action Bias

“Well, at least you tried.” This common consolation can be comforting and justified in many decisions, but not all. In some situations, it can actually be better to do nothing at all. The problem is that our minds want to take action. In our minds, it hurts less to try something and lose, compared with doing nothing and losing anyway. During times of market volatility, if investors don’t calmly think about the appropriate course of action and give in to action bias, it can make losses objectively worse despite feeling subjectively better.

Loss Aversion

One of the most well-known and often-cited behavioral biases, loss aversion, can be especially prevalent during market volatility. Specifically, a 10% portfolio loss feels more intense than a 10% gain for many investors because we are loss-averse: Experiencing a loss generally feels twice as bad as gaining the same amount feels good. This strong emotional reaction to losses can cloud our judgment during times of volatility.

How to Get Ahead of Our Biases

Unfortunately, our biases are part of what makes us human, and we can’t erase them completely, but that does not mean that all hope is lost. The first step to combatting our biases is to understand and acknowledge them. For example, when the market drops and your gut tells you to sell now, take a moment to recognize that emotion is a possible example of action bias. Besides just accepting our biases, here are a few things we can do to make sure they don’t wreck our finances:

1) Reframe performance

Is your financial goal to get the most returns possible? Or is it to have a comfortable retirement or buy a lake house in a few years or save for your 2-year-old child’s college costs? For many investors who have already tailored their financial plans to their long-term goals, short-term fluctuations may not be too big of a concern. When considering the performance of your portfolio, keep your long-term goals in mind and not the day-to-day ups and downs of the market.

2) If you need to take action, take thoughtful action.

Instead of trying to suppress the urge to act, a better strategy may be to redirect it. For example, instead of looking to see what losing investment to sell, spend your energy making sure your financial plan is on track to meet your goals. This could involve making sure your portfolio is well diversified or making sure your emergency savings fund is well stocked. Or, if a scarcity mindset is getting the better of you, now may be a good time to do a budget audit to cut down on any unnecessary expenses.

3) Stay connected, but not too connected.

Constant market updates can put anyone on edge, especially during market volatility. It’s important to stay connected and up to date on world news, but constant monitoring of media feeds can trigger behavioral biases. There’s a line between being an informed investor and obsessing over every market movement and, especially during times of market volatility, this line can become more and more blurred. Try setting up a regular schedule for how often you check your portfolio or even the market news. And, while you’re at it, maybe cut down on the number of news alerts you receive on your phone.

We all know to expect things like market volatility and inflation, but the emotions we feel while they occur can be even more dangerous than market movements themselves. When stress and anxiety are high, it’s easy to give into our biases and let them cloud our better judgments.

The interventions above can help us overcome our biases, not do away with them. Using techniques from behavioral science, we can work to prevent biases from derailing financial plans by making it easier to make the right decision when it counts and staying focused on our long-term goals.

Morningstar Disclaimers:

The opinions, information, data, and analyses presented herein do not constitute investment advice; are provided as of the date written; and are subject to change without notice. Every effort has been made to ensure the accuracy of the information provided, but Morningstar makes no warranty, express or implied regarding such information. The information presented herein will be deemed to be superseded by any subsequent versions of this document. Except as otherwise required by law, Morningstar, Inc or its subsidiaries shall not be responsible for any trading decisions, damages or losses resulting from, or related to, the information, data, analyses or opinions or their use. Past performance is not a guide to future returns. The value of investments may go down as well as up and an investor may not get back the amount invested. Reference to any specific security is not a recommendation to buy or sell that security. It is important to note that investments in securities involve risk, including as a result of market and general economic conditions, and will not always be profitable. Indexes are unmanaged and not available for direct investment.

This commentary may contain certain forward-looking statements. We use words such as “expects”, “anticipates”, “believes”, “estimates”, “forecasts”, and similar expressions to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results to differ materially and/or substantially from any future results, performance or achievements expressed or implied by those projected in the forward-looking statements for any reason.

The Report and its contents are not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Morningstar or its subsidiaries or affiliates to any registration or licensing requirements in such jurisdiction.

MeDirect Disclaimers:

This information has been accurately reproduced, as received from Morningstar, Inc. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. Any decision to invest should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Join MeDirect today to access the tools you need to put your money to work on your own terms.

Latest news articles

Playing demographic divergence now
All News

BlackRock Commentary: Playing demographic divergence now

The working-age populations in developed markets (DMs) are dwindling, contrasting with the growth observed in emerging markets (EMs). This trend adversely affects economic growth in DMs while bolstering growth prospects in EMs—a divergence that, according to BlackRock, is widely evident in asset valuations.

Hacktivism is hacking but for a political or social cause, rather than just for money. This article explores the threats from hacktivists and the ways to defend yourself and your organisation.
All News

As elections loom, beware of hacktivism

Hacktivism is hacking but for a political or social cause, rather than just for money. This article explores the threats from hacktivists and the ways to defend yourself and your organisation.

When building an investment portfolio, make sure to keep track of the fees and expenses you are being charged to trade or hold specific assets. This will help you ensure you enjoy the best possible returns from your money.
All News

Investing: Understanding Fees and Expenses

When building an investment portfolio, make sure to keep track of the fees and expenses you are being charged to trade or hold specific assets. This will help you ensure you enjoy the best possible returns from your money.

Experience better Banking

The sooner you start managing your money, your way, using the best-in-class tools, the sooner you’ll see results. 

Sign up and open your account for free, within minutes.



We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.