“Stay disciplined.” “Stick to your plan.” “Don’t give in to your emotions.”
That’s sound investing advice — and not just during market downturns. It also applies when the market is moving quickly. While “fear of loss” might cause impulsive decisions during a slump, a rising market can lead to hasty actions driven by FOMO — “fear of missing out.” In either situation, investors can let their emotions override their judgment.
Although the market’s path from here until the end of 2025 is anyone’s guess, the robust bounce-back from April’s decline has many investors savoring the possibility of a third consecutive year of double-digit returns (as measured by the S&P 500 index). Indeed, Warren Pies at 3Fourteen Research recently concluded, based on a newly constructed Daily Sentiment Composite, that current sentiment is characterized by “excessive optimism.” (The 3Fourteen indicator is based on surveys, options activity, ETF flows, and more.)
To be sure, advances in AI, the mainstreaming of crypto investments, and a more business-friendly regulatory environment are signaling positive times ahead. In such a climate, especially with high-flying stocks and funds repeatedly hitting new records, a broadly diversified investing approach can seem slow and unexciting. It’s tempting to abandon “dull” investing and take concentrated positions in high-octane tech stocks, crypto, and other assets that are outperforming.
We’ve been down a similar road before, of course. In the late 1990s, the dot-com bubble seemed unstoppable — until it screeched to a halt, and the dollar signs in the eyes of many once-enthusiastic investors turned to tears. (Ironically, many ideas and innovations that generated great excitement during the tech bubble eventually became a reality, but not before hundreds of “next big thing” companies were heavily devalued or went bankrupt.)
SMI, of course, welcomes good times and strong returns! But market history shows it’s wise to balance optimism with proper caution. So if you’re considering abandoning a risk-appropriate, diversified investing plan in hopes of higher gains in the current market environment, we encourage you to think carefully before acting. These suggestions may help.
Curb your enthusiasm.
We are not “Debbie Downers.” Through wars, depressions, national tragedies, and social unrest, the U.S. stock market has proved resilient, maintaining its long-term upward climb. So longer-term optimism is justified.However, the market’s upward trend has never been smooth, at least not for long. The climb is marked by unpredictable pullbacks and fear-inducing plunges. It’s never a question of “if” the market will turn downward but “when.”
So, yes, long-term optimism about investment growth is well-founded, but keep shorter-term optimism in check.
Don’t become overconfident.
Sound Mind Investing wants you to be a confident investor. By that, we mean we want you to have a clear understanding of the fundamental principles of successful investing, write down your investment goals, and use strategies and asset allocations that match your risk tolerance and current life stage.However, we don’t want you to be overconfident. Overconfidence comes from thinking you know what the market will do next. No one knows that — not Peter Lynch, not Warren Buffett, and not SMI.
Expecting the market to always go up — an expectation that grows during strong rallies—is foolish. That’s not how the market operates. Investing involves two steps forward and one step back. Sometimes, it might be two steps forward and three or four steps back!
Ignore the hype.
The financial media isn’t your friend. In their pursuit of viewers and clicks, financial TV and websites emphasize sensational news (“This 19-year-old made a killing in crypto!”) and market predictions (“Why to buy these three tech stocks now!”).That kind of information doesn’t do much to help you be a successful long-term investor. Remember, your investing plan should be based on your needs and goals, not the news of the day or the opinions of “experts” on a TV show.
Stay diversified.
People like to make comparisons. “The remake was lame compared to the original.” “This year’s team is better than last year’s.”Unfortunately, many investors make “apples to oranges” comparisons when evaluating investment performance by comparing a diversified, risk-appropriate portfolio to a market index such as the S&P 500 or the Nasdaq Composite.
Your portfolio likely includes different asset classes, such as large-cap, mid-cap, small-cap, and foreign stocks, perhaps along with “alternative” investments like commodities, gold, and real estate. Depending on your age and risk tolerance, your portfolio might also hold fixed-income assets such as bonds.
Broad asset-class diversification naturally causes such portfolios to perform differently from a popular market index, especially if the benchmark is heavily influenced by a small number of outperforming stocks and sectors, as seen with the S&P 500. (As of August 2025, just seven stocks made up approximately 35% of the S&P 500’s market weight.)
For most investors, a more appropriate comparison is a “blended” benchmark that reflects a diversified investing strategy. To help SMI members better understand suitable performance comparisons, last year we added a “Blended Portfolios” table to the performance data on the back cover of each issue of the SMI newsletter (and on our main web page). The returns shown for these model portfolios more accurately represent what an investor might expect when using a diversified approach.
Sometimes, diversification can make you “feel” like you missed the boat. “Wow, look at (insert hot stock/fund here)! If only I had invested a lot of money in that!” But what if that hot holding suddenly sinks and drags a big part of your portfolio down with it? Diversification serves as a hedge against such a situation. Additionally, being diversified helps an investor stay calm and remain on course when the market gets tough.
As investment writer (and behavioral psychologist) Daniel Crosby states in his book The Laws of Wealth, “Investing broadly is as much about managing fear and uncertainty as it is concerned with making money. At its essence, diversification is applied humility in the face of an uncertain future.”
Crosby’s counsel strongly echoes Ecclesiastes 11:2, which states, ”[D]ivide your investments among many places, for you do not know what risks might lie ahead” (NLT).
“Be on your guard…”
When the market is hot and you’re tempted to throw caution to the wind, take a step back and think about your motivation. What are you trying to achieve and why?
Only you can answer that question. But keep these two things in mind. Jesus warned us: “Be on your guard against all kinds of greed” (Luke 12:15). And in Hebrews 13:5 we find, “Keep your lives free from the love of money.”
No, not every investor who takes risks, even large risks, is necessarily greedy or in love with money. But greed and the love of money are common temptations. And, for investors, these temptations tend to grow when optimism is “excessive” and the market is hitting new highs.
So what should you do when the market is strong? Enjoy it! But also, stay disciplined, stick to your plan, and don’t give in to your emotions.
