Building Wealth with Discipline and Diversification

Building wealth is a personal, long-term journey requiring a disciplined approach to avoid the emotional hurdles that investing presents us. One of the toughest challenges investors face is managing these emotions while maintaining realistic expectations. None of us are immune to the emotions that impact our financial decisions. Unfortunately, these emotions can cause us to make incorrect and costly decisions.

Here are five emotion-based behaviors we can fall into when the markets are volatile. The basic emotions of greed (how much I make if I am right) and fear (how much I will lose if I am wrong) can lead to critical mistakes, potentially undermining the pursuit of your financial hopes and dreams.

1. Panic Selling: When markets dip — like the $5 trillion S&P 500 drop earlier in 2025 — fear can push you to sell investments at a loss, missing a potential recovery, such as the 400% post-2009 rebound. Selling when the market is dropping might seem like the prudent thing to do, but one of the most difficult and treacherous tasks when you are out of the market and in cash is deciding when the optimal time is to get back in. Choosing the wrong time can cause even more losses or can result in you missing significant appreciation after the turnaround.
2. Chasing Trends: Excitement or the FOMO (Fear of Missing Out) emotion might lead you to buy into the hype often at peak prices, like following the crowd into Bitcoin at $106,787 in January of this year before its 26.1% drop to $78,917 only 10 weeks later. Many times lost in the chase is the implementation of a thorough valuation process to determine whether the investment you are buying is worth the cost of admission. Often, if there has already been a run up in the stock price of a company, the price may exceed what might be a reasonable value, and you could be significantly overpaying for a stock.
3. Overconfidence: After a winning streak, you might overestimate your ability to select winning investments by making risky bets — for example, leveraging a stock portfolio or choosing imprudently aggressive investments, while ignoring the balance between risk and reward.
4. Hoarding Cash: Anxiety during periods of volatility can trap you in excessive amounts of cash or cash equivalents where inflation (around 3% in early 2025) erodes the entire return by reducing the overall long-term growth of your investments. While in recent years the return on cash or cash equivalents has been higher at least compared to the period immediately preceding it, having too much cash for too long will drastically affect long-term returns and have a significant impact on financial planning objectives, such as when you can retire or whether you will have enough to manage a long-term care event.
5. Avoidance: Market stress might cause you to ignore financial planning, delaying critical moves like maxing out a 401(k) ($23,500 in 2025, or $31,000 if you’re over 50) and risking not meeting your retirement goals. Regularly contributing to a retirement plan, knowing that you are dollar cost averaging into the market over a long period of time can make this process systematic and seem effortless, especially when your net earnings easily take care of your living expenses. Learning to live on the difference and within your means will be critical to developing long term wealth.

This is where a financial advisor in Boulder, CO, like Peak Asset Management, can help you recognize and minimize the impact of these behaviors, keeping your focus on executing a disciplined investment strategy.

Objective Decision Making is Key to Pursuing Financial Independence

Making objective decisions can be your strongest ally when pursuing financial independence, especially when markets are more volatile or emotions subject you to making irrational decisions. 

The following are principles that should be utilized in wealth management and investing. These strategies can assist you in the management of your investments and provide clarity and confidence. Applying these principles can help you make more objective, data-based decisions when markets are most volatile. But beware – although they are easy enough to understand, they can be difficult to follow regularly and consistently:

• A down market should be considered a buying opportunity. Not only are share prices lower, but you also get more shares when you make your purchase decisions. How to deploy capital in these types of down markets is a much more challenging subset of decisions.
• Stick to a pre-set financial plan outlining your goals, risk tolerance, and allocation (e.g., 60% stocks, 30% bonds, 10% cash equivalents). This will prevent you from reacting to short-term swings while keeping you focused on the longer term. When your basic pre-set plan becomes imbalanced due to a move in the markets, rebalancing back to your target percentages might be a prudent strategy. Establishing your personalized asset allocation strategy can be complex and should be considered carefully.
• Your biggest financial risk is not the volatility of the stock market, which will always go up and down with economies and earnings outlooks. Your biggest financial risk is failing to pursue your financial goals in a dedicated way. For example, you may not accumulate enough assets to retire when you want to and live as you want, if you decide to delay contributing a 401k or IRA or prioritize spending versus saving. For most people, becoming wealthy and/or retiring when you want to necessitates discipline and the unwavering dedication to a process. 
• Base decisions on realistic portfolio returns — for example, a 6% average net return over 10 years — versus emotional triggers caused by what you see in the news. News in the media is designed to create followers and advertising revenues, often times preying on your emotions. It can result in unrealistic expectations, or steer you toward investments that are difficult to understand and fraught with risk.  A sensible expectation of a return, the proper investments that give you the best chance of achieving this return, and time (the most important factor of all) will be critical to your investing success.
• Look at past recoveries, such as the S&P 500’s 400% rise since 2009, to remind yourself that excess volatility has always faded with time, encouraging a disciplined, consistent approach. Although they can be stressful and difficult, most market downturns are relatively short periods of time. But the results often awaiting the patient investor on the other side should help provide the mental fortitude to stay the course.
• Define clear disciplines (e.g., a 10% drop prompts a portfolio check) and a buying opportunity (not a sale) to avoid impulsive moves and align your actions with your financial goals. Acting within a clear and defined investing framework allows you to avoid potentially damaging emotional and directionless decisions.

For an impartial view and an approach that will put the above investing principles to work for you, consider forming a partnership with a fee-only financial advisor in Boulder, CO. We can help you deploy the above principles in an objective way and weigh other strategies like tax-loss harvesting or rebalancing your portfolio based on your personalized investment portfolio and accepted investment disciplines to help add efficiencies to your overall plan.

The Case for Diversification, Especially During Periods of Excess Market Volatility

Diversification strategies can help stabilize your portfolio’s returns when markets turn volatile and assist in avoiding unnecessary risk when positions you have become too concentrated. 

The following are five approaches for optimizing your portfolio’s diversification strategy:

1. If appropriate, allocate your funds across stocks, bonds, and other traditional investment categories, such as real estate. For instance, a 60% stock, 30% bond, and 10% real estate mix might soften a dip in the stock market due to rising concerns about inflation or a recession. Non-correlated assets can move in opposite directions, depending on which way the market is going. This can help minimize the downside when the market is falling. Diversifying across different asset classes can be an effective way of managing risk.
2. Including some international equities alongside U.S. stocks in a portfolio of investments can help diversify your stock holdings. Keep in mind that not all of the best companies are headquartered in America. If U.S. markets see a correction due to inflation or a recession, investments in specific European or Asian companies may soften the impact and open the door to additional growth opportunities.
3. Mix in industry sectors like technology, healthcare, energy, and consumer staples to get a broad range of businesses. Some economic events will impact certain sectors more than others. For example, a recession would impact a car company more than a utility or an energy company, and health care stocks often resist general market downturns because of the necessity of the industry. Thus, utility, energy and health care stocks can provide a partial buffer during volatile or down markets. A diversified portfolio based on multiple economic sectors can be a great strategy for minimizing this risk. 
4. Consider boosting your holdings in U.S. Treasuries or municipal bonds. These add stability when stock values are in a general decline because they tend to be non-correlated asset classes (as discussed above). The higher interest rate component of these investments create stability for portfolios with large common stock components. Consider interest payments as providing some level of insulation from more volatile stock prices impacted by earnings expectations.  
5. Include consistent dividend payers (e.g., common stocks, preferred stocks, convertibles) in your portfolio. These can offer steady cash flow during market swings, supporting your long-term financial goals. And if the market goes down, dividend payout percentages go up. If you are reinvesting these dividends back into the investments, you will be buying and increasing your number of shares continually over time, which will amount to a larger stock position and dividend payout in the future. 

Connect with us to explore how discipline and diversification can support your pursuit of financial independence. We are here to help.