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According to J.P. Morgan Asset Management, the average investor yielded an average annualized return of 2.1 per cent from 1996 to 2015, compared to a return of 8. 2 per cent on the S&P 500.Kim Kyung-hoon/Reuters

Given the headlines coming out of the United States these days, some people may be tempted to think their money would be better off under their mattress than in stock markets that are subject to global unrest.

Consider a conversation that Bev Moir, director and senior wealth adviser at Scotia Wealth Management in Toronto, recently had with a client who was vacationing in the United States.

"She was worried because she'd heard that some people are thinking we'd go back to the 1930s," Ms. Moir says. "There are some pretty strong, powerful worries out there. A lot of clients are anxious about the Trump effect and how it's going to play out."

Even though the Dow Jones industrial average hit a record high after the inauguration of U.S. President Donald Trump, the U.S. election is one of several recent unexpected political events globally and it's not hard to see how fear and anxiety can play a role in people's investment decisions.

Financial experts urge investors to hold steady, however, and caution against letting emotions rule their portfolios.

"It's a constant," adviser Janine Purves says of the risk of emotional investing. "Headlines just add to it. People are thinking they need to get out [of the market] or they need to get in. If you're dealing with anybody who's trying to save for their own future, they're emotionally moved by headlines or their own life."

The role of a financial adviser is to coach clients through perceived gloom and doom, she notes, pointing to facets of behavioural economics that come into play.

Loss aversion, for instance, describes how people experience a setback twice as severely as they experience a gain. That aversion clouds sound decision-making; in a down market, people may be inclined to sell even if an adviser has warned that stocks go up and down and to stay the course.

The opposite can occur as well: "If they had a great day or great year think they can take more risk," says Ms. Purves, senior financial adviser with Assante Capital Management Ltd. in Richmond Hill, Ont.

Then there's confirmation bias, which occurs when people actively search for, favour and recall information that supports their pre-existing beliefs or theories. In science, giving less weight to evidence that discredits those preconceptions leads to statistical errors. In investing, it can contribute to poorer returns.

According to J.P. Morgan Asset Management, for example, the average investor yielded an average annualized return of 2.1 per cent from 1996 to 2015, compared to a return of 8. 2 per cent on the S&P 500. Whether those lower rates were because of emotional or uninformed investing or a combination of both isn't clear, but advisers suggest they support the need for comprehensive, advance planning rather than knee-jerk reactions.

"Everyone has biases, but I think the biggest issue is that people don't usually recognize it," Ms. Purves says. "Our biggest job is making sure they stick with the plan. When you're buying something – a stock per se – you need to have a game plan of when you plan to sell. When you're buying it, you're thinking about it logically.

"People tend to overreact on the negative side, which is why having a game plan is so important," she adds. "Everyone says they want to get a 10- or 20-per-cent return but if you're going to sell as soon as an investment drops by four [percentage points], you're not that candidate."

Ms. Purves emphasizes that advisers need to understand what their clients' priorities are, when they're going to need money, and how much. That all requires forecasting and identifying what they can handle in terms of risk.

Identifying short-term goals is just as important as long-term goals; in addition to managing a portfolio in a way that mitigates risk, Ms. Purves looks to set up short-term funds that are out of the market and that could be drawn on in an emergency.

Crucial to sound financial decision-making is determining an investor's time horizon, Ms. Moir says. The conversation around investment decisions looks very different when people are 15 years away from retirement than if they're fast approaching it or already retired.

"What is the purpose of this particular money they're worried about? If somebody needs the money in a short time frame, then they do not belong in long-term equities," she says. "If somebody needs money within a year, then it is a good time to take some money off the table. The Toronto stock markets had a strong year last year; the S&P and Dow hit record highs since the election results were confirmed."

When stocks are down, people with a long time horizon may be surprised by how fear can cloud their judgment. "When somebody wants to sell and I feel confident it's the wrong time to sell, it's an emotional decision, I explain that, actually, this is the time to be buying," Ms. Moir says.

With new investors, Ms. Moir spends time educating them about the basics so that they're better able to make informed decisions to reach their financial goals. However, even seasoned investors are not immune from the impact of troubling headlines; what tends to stick in many people's minds are stories of epic collapses such as Nortel and Enron. To allay their anxiety, Ms. Moir gives clients reality checks.

"A very emotional scenario is when people think they will put their money into something and it will go down to zero," Ms. Moir says. "If a client is experienced in investing and is reacting emotionally, sometimes it's a case of me reminding them that I want all my clients to sleep at night, and I do, too. I'm on the conservative side. I believe in quality, blue-chip dividend-paying stocks. We're diversified, we don't have all our eggs in one basket, we pay attention to asset allocation.

"Sure, it's a scary time," she adds. "Trump could do something that's disastrous, but we are in good quality investments. I bring them back to that to calm them down."