Citi Wealth recently published a financial education report identifying cognitive biases that regularly undermine investor outcomes and distort portfolio decisions over extended periods.
The average equity fund investor earned 16.54% in 2024, while the S&P 500 returned 25.02% during the same period, according to DALBAR’s 2025 Quantitative Analysis of Investor Behavior. That 848-basis-point gap is the second-largest performance shortfall of the past decade.
The investor biases Citi wants you to recognize
Citi Wealth’s report breaks down six cognitive traps that influence how you buy, sell, and hold investments over time. Each one operates below conscious awareness, making these biases particularly difficult to catch.
Loss aversion
You feel the sting of a $5,000 portfolio loss far more intensely than the satisfaction of a $5,000 gain in your account. Citi identifies this asymmetry as one of the most damaging biases an investor can carry into any market environment.
The tendency leads you to hold losing positions far too long, hoping to avoid the psychological pain of locking in a realized loss on paper.
The endowment effect
You overvalue a stock simply because it already sits in your brokerage account, regardless of current fundamentals.
Citi describes this as the endowment effect, in which ownership alone inflates perceived value beyond fair market value. Behavioral Economics researchers have replicated this pattern in dozens of controlled experiments. The result is holding declining assets longer than rational analysis would suggest.
Herd mentality
When markets surge, you feel compelled to buy because everyone around you is buying and visibly profiting from the momentum trend. When markets plunge, you sell because the collective panic feels impossible to ignore without taking immediate protective action.
“We’re wired to actually run with the herd. Our approach to investing is actually psychologically the absolute wrong way to invest, but we’re wired to do it that way,” said YMW Advisors Financial Psychologist Brad Klontz, as CNBC reported.
Citi warns that this behavior reinforces price swings in both directions, leading investors to repeatedly buy near peaks and sell near bottoms.
Anchoring
You bought a stock at $150, and it has dropped to $90, but you refuse to sell because your purchase price feels like a floor. That is anchoring in action, and Citi says it occurs across investor portfolios without any logical financial justification.
The purchase price, a recent high, or an analyst target becomes a mental reference point that distorts your current view of the investment.
Confirmation bias
Confirmation bias causes you to seek out news and research that reinforces beliefs you already hold about a specific investment position. You dismiss or minimize contradictory information, even when it carries significant weight from credible, well-established sources.
The danger extends beyond a single trade because the bias breeds overconfidence that poisons broader portfolio strategy over time, The Corporate Finance Institute warns.
Underestimating downside risk
Citi’s final bias is the tendency to underestimate the potential for negative outcomes from your investments or overall portfolio allocation strategy. FINRA cautions that when investors underestimate downside risk, they may take on more exposure than their true tolerance allows and neglect proven risk-management approaches such as diversification.
The cost of investing-behavior missteps on your returns
The financial damage from these biases is not theoretical; two of the most respected annual studies in behavioral finance demonstrate it. DALBAR’s latest report shows equity fund withdrawals occurred in every quarter of 2024, with the largest outflows arriving just before a major rally.
“Whether through late re-entries, poor rebalancing, or tactical moves that missed rallies, the end result was the same: more effort, less return,” the DALBAR report stated. Morningstar’s 2025 Mind the Gap study found that the average dollar invested in U.S. mutual funds and ETFs earned 1.2 percentage points less annually.
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That shortfall, equal to roughly 15% of total potential returns over a decade, has persisted at similar levels across four consecutive measurement periods, according to Morningstar’s research. Compounded over a longer horizon, that gap reshapes your retirement outlook in meaningful and genuinely concerning ways.
The more investors traded during the study period, the less their average invested dollar earned in realized returns. Morningstar’s data confirmed that funds with the most stable cash flows had gaps of just 0.8% per year, a full percentage point narrower.
Practical steps to protect your portfolio
Citi’s report emphasizes that the first step toward overcoming bias is acknowledging these tendencies in your own decision-making.
Awareness alone won’t eliminate the problem, but it creates the mental space needed to pause before acting on impulse, a point echoed in CFA Institute research on behavioral finance.
Build a solid structure
Establishing a written investment policy statement (IPS) with clear objectives, target allocations, and predefined rebalancing triggers provides a clear framework.
The CFA Institute’s guidance on IPS elements for individual investors calls the document a “road map” that forces investors to articulate needs and constraints within realistic goals, and the Corporate Finance Institute illustrates how a properly drafted IPS can keep a client from abandoning strategy to chase a hot sector.
When a portfolio drifts from its targets, the policy tells the investor what to do, removing emotion from a process that should be driven by data.
Automate what you can
Morningstar’s research showed investors in allocation funds, which automate rebalancing and asset allocation, captured nearly 97% of their funds’ total returns. Automatic contributions through payroll deductions, target-date funds, and systematic rebalancing tools all reduce the need for discretionary decisions, where biases most often intervene.
Consider professional guidance
Citi suggests that working with a professional investment manager can reduce the impact of personal biases on portfolio management decisions. A fiduciary financial advisor serves as an objective check against the emotional impulses that drive poorly timed trades during periods of stress.
What Citi’s tips mean for your 2026 investment plan
Market conditions heading into 2026 have already seen periods of volatility, and some institutions, including Bank of America, have noted that investors may still be underestimating the potential for sharper swings.
Forecasting short-term market direction has historically been unreliable. Research from CXO Advisory Group, which reviewed thousands of professional forecasts, found accuracy rates below 50%. In that context, outcomes tend to depend less on prediction and more on how decisions are structured over time.
Long-term performance studies from firms such as DALBAR and Morningstar consistently point to a similar pattern. Investor results are often shaped more by timing decisions and behavioral responses than by the underlying investments themselves.
Related: Citi exposes the tax break most investors leave on the table every year
