Panic cost this investor $43,000. Avoid this simple mistake in the market chaos to come in 2026

Wednesday, 24 December 2025

The “sleep at night” test is an old psychological benchmark often used to gauge the risk tolerance of an investor.

There’s no complex mathematics or spreadsheets involved in this test. It’s based on a simple premise: if your investments are causing you to lose sleep, you’re taking too much risk.

This isn’t a one-off test. It’s an ongoing piece of self-reflection that you need to engage in as your portfolio grows and you make different investments.

If you feel an unrelenting pit in your stomach, an obsessive desire to constantly check the performance of your portfolio and feel sleep steadily commandeered by the wiry clutches of anxiety and doubt, then chances are your portfolio isn’t well aligned with your risk appetite.

The problem with getting this balance wrong is that it leaves you vulnerable to emotional decision-making, which runs counter to what you should be doing to build long-term wealth.

Pie Funds chief client officer James Paterson says investors who panic in times of volatility often hurt their portfolios in the longer term.

He points to the example of a client who invested $100,000 in a diversified fund in 2018.

Had that client just left that money where it was, it would have grown to more than $204,000 today.

Rather than leaving the money alone through market tremors, the client panicked and made three $20,000 withdrawals on what turned out to be the worst possible days.

Paterson says the investor got spooked during Covid in March 2020, then again in early 2022 due to the Ukraine war and then more recently in April 2025 when Trump’s tariffs hit the market.

Based on those withdrawals and subsequent growth, the client’s standing balance in his portfolio was around $101,000. When you then add on the $60,000 in withdrawals, you end up with a total of $160,000.

The unnecessary panic cost the investor $43,000 in lost gains in this example – a hefty tax to pay because your nerves get the better of you.

“The ultimate success or failure will depend on your ability to ignore the noise and the worries of the world long enough to allow your investment to succeed,' says Patterson.

Volatility isn’t going away

The investing cliché reminds us that markets sometimes go up and they sometimes go down.

This will not change in the coming year – nor in the years beyond that.

Looking back at the example of the client, it becomes evident that locking in losses when the market is low deprives you of the opportunity to benefit when the market does once again turn around.

“Feeling skittish is normal,” says Katie Wesney, a financial adviser and the chief strategic coach at Enable Me.

“Our brains are wired to react to short-term threats, even at the cost of long-term gains. I often find the most expensive financial mistake isn't choosing the wrong investment. It's selling a good investment at the wrong time. If your timeline hasn't changed, your strategy probably shouldn't either.”

Paterson agrees, saying that staying calm, being consistent and retaining discipline in the face of all the noise we hear is often the best approach to generating good long-term outcomes.

Diversification is key to better sleep

Trump will still be in power in 2026, the Ukraine war has not yet ended, and we’re all still waiting to see what happens to the enormous AI hype that has pumped up tech company valuations.

All these factors will continue to create a volatile environment in the coming 12 months, which means we can expect further troughs and peaks in the coming year.

AMP KiwiSaver managing director Jeff Ruscoe says that no matter how volatile things become, the old rules of smart investing still apply.

“The investors who benefited most in 2025 were those who stayed focused on fundamentals: diversified portfolios, long-term objectives and disciplined decision-making,” Ruscoe said.

“Global markets have entered a period shaped by powerful structural forces: technological transformation, geopolitical fragmentation, changing energy systems and shifting demographics.

“These ‘mega-forces’… will continue to influence markets long after the news cycle moves on. Trying to time them is impossible. Positioning for them is not.”

There are two important messages to take from Ruscoe’s assertion here. The first is that diversification of your investment portfolio is integral to a long-term wealth-building plan.

A diversified portfolio is one that spreads investments across different categories (stocks, bonds, index funds, cash, property and so on), geographies (for example, stocks in different countries) and businesses (don’t put all your eggs in one basket).

This ensures that your entire wealth isn’t dependent on the performance of only a few companies. It means that you can ride out a market dip without having your wealth completely annihilated.

The other important thing to note here is that trying to time the market is a fool’s game. You can sometimes get lucky, but the big market shocks are called “shocks” because they’re unexpected.

As the investor Peter Lynch famously said: 'Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.'

Perhaps the recently retired Warren Buffett said it even better: 'The stock market is a device for transferring money from the impatient to the patient.'

How to wreck your portfolio

Numerous studies have shown that missing just the 10 best trading days over a 20-year period can often cut your total return in half.

The reason for this is that the best days on the market often happen within a few days of the so-called worst days.

Getting this right requires you to be incredibly lucky not just once, but twice in quick succession.

You need to know exactly when to exit before a crash, and then you need to know exactly when to re-enter once the recovery has happened.

That requires a level of clairvoyance that even the Sage of Omaha (Buffett) didn’t bother engaging in.

Most of us tend to get this wrong on the way down by selling in panic when the market has already dropped.

And then we also get it wrong by responding to the crowd and buying in the middle of a recovery.

What this means is that we essentially cut our returns by panicking in both directions.

It’s a reminder that the best way to ensure you don’t miss the boat is by just staying on it – even if things feel a little stormy from time to time.