Last Updated on December 2, 2024
Overview – Knowing How to Maneuver Volatile Times
There are a lot of things investors dread, but the one that comes front of mind, or at least very close to it, is having to deal with volatile markets.
Throughout history, there have been countless times when financial markets around the world descended into chaos. Wars, pandemics, macroeconomic developments, political upheaval: all sorts of reasons can lead to financial markets humming along one day and turning completely upside down the next.
During these times, it’s very easy for some investors to feel lost. Because of their lack of direction, they’re more susceptible to making poor, emotionally-driven decisions which can prove to be very costly, now and in the future.
While many investors find themselves falling victim to volatile markets, just as many can emerge from them relatively unscathed, how? When equipped with the right knowledge, investors can successfully navigate these bouts of volatility no matter how many times they appear.
Dealing With Volatile Markets Doesn’t Have to Be Overly Complicated
Like many aspects of investing, taking an unnecessarily complex approach to solving a problem doesn’t always guarantee desirable results – efficacy does not grow at a commensurate rate with complexity. The same can be said about dealing with tumultuous markets.
Now, this doesn’t mean getting through a period of volatility is a walk in the park, because it certainly isn’t. Choosing to underestimate the seriousness of volatile markets may inflict even more damage on an investor’s portfolio that could otherwise have been avoided.
With that being said, almost all bouts of market volatility more or less follow the same pattern in terms of how they play out, which means investors don’t need to take a unique approach every time to deal with them.
By keeping a few key principles in mind, investors can successfully navigate periods of intense volatility without losing their capital, and sanity, in the process.
Keeping Yourself Emotionally Grounded by Staying Rational
When financial markets descend into chaos, one of the first things investors quickly lose is their ability to think rationally. With so much going on around them and with few signs of when markets will return to normal, investors are quick to let their emotions take control of their decision-making, which almost always never ends well.
We’ve talked about how emotions and investing are connected, as well as the importance for investors to have strong emotional intelligence. Despite these past discussions, the importance of keeping a tight leash on your emotions cannot be stressed enough.
In the face of volatile markets, the investors who lose their ability to think and act rationally are the first ones to lose. So, one of the first things investors will want to do when dealing with tumultuous markets is to reel their emotions in and return to a state of rationality as quickly as possible.
Very few, if any, good investment decisions are made when they’re emotionally driven. There is no shortage of stories of investors who panic sell only to realize they’ve made a very grave mistake shortly after.
All of the subsequent steps we will discuss won’t matter if an investor can’t think logically, which is why this is the first step we go over.
Take a Good Look At How Your Portfolio Is Doing
Now that an investor has regained their cool, the next step they’ll want to take is to have a good look at their portfolio.
When faced with volatile markets, many investors mistakenly believe that their portfolios have taken a major hit and that they need to act immediately to reverse course.
While volatility can affect virtually all investors, it’s easy to forget amidst all the frenzy that not all investors will be impacted to the same extent. Some investors may see very large swings in portfolio value, while others may only experience relatively small changes.
Therefore, while some investors will certainly need to take decisive action, others may not need to do anything at all. It all depends on a given portfolio’s performance, something that can be assessed in various ways.
Choosing to make drastic changes to a portfolio when it isn’t needed almost always does more harm than good, which is why investors need to have a clear understanding of how their portfolios are doing when markets descend into madness.
If an investor does decide that action is warranted, then it’s important to take a step back and ask if this decision was made rationally and to understand what exactly they’re trying to achieve by taking this action.
Filtering Relevant and Irrelevant Information
Whenever periods of volatility or general chaos grip financial markets, there is no shortage of news releases, videos, articles, and other forms of media that try to cover current events. Given that so much is going on, it’s understandable that investors will want to get as much information as they can to figure out their next move.
But while some of these sources provide useful information, others may provide no real insight at all, or worse, simply fan the emotional flames even more.
An investor can’t possibly hope to make good decisions without having relevant, high-quality information to work with. This is true when times are calm, and is especially true when trying to navigate volatile markets. It’s no exaggeration to say that the information an investor works with can make or break their decisions.
So, during these tumultuous times, investors will need to know how to filter relevant and irrelevant information.
Of course, what counts as “relevant” and “irrelevant” will vary between investors, as well as the type of information they’re looking for. What one investor sees as invaluable may not mean much in the eyes of another, and vice versa.
Keep an Eye on What Other Investors Are Saying and Doing
Up to this point, our discussion has focused solely on the individual investor, and for good reason. Most of an investor’s success (or failure) can be attributed to their actions, attitudes, and decisions. Investors can’t possibly hope to control the hearts and minds of others, so it makes sense to focus on what they can control: themselves.
That being said, while investors can only control themselves, this doesn’t mean they can afford to ignore others around them.
There is merit in understanding how other investors are acting and thinking, which is something that has been discussed before. That’s because paying attention to what other investors are saying and doing could lead to new insights, ideas, or critical bits of information that would otherwise be missed.
If a multitude of investors are acting similarly or echoing similar sentiments during bouts of volatility, then there could be something important waiting to be uncovered. This doesn’t automatically mean what they’re doing makes sense, but it certainly doesn’t hurt to check.
While keeping tabs on other investors does have its benefits, it would be wise to exercise additional caution when making these observations during volatile markets. That’s because other investors may not be acting rationally, meaning just because they say or do certain things doesn’t mean it’s rooted in sound logic.
Think Twice Before Deciding to Make Any Big Moves
In all of the preceding sections, there was a shared theme among them: the actions an investor decides to take.
When markets fall into disarray, bad news seems to be never-ending, and emotions are running high, so one of the first things that comes to mind for many investors is asking “What can I do?”
Taking quick, decisive action is certainly important, and in some cases can prove to be very effective at keeping an investor’s portfolio safe. But quick action is a double-edged sword: if carried out too hastily, it also has the potential to set investors back quite significantly.
During volatile markets, many investors find themselves falling for this “action trap”, that is, the belief that the more they do, the better off they’ll be.
Staying rational, assessing portfolio performance, filtering information, and understanding what other investors are doing all amount to one goal: ensure the actions an investor takes when trying to navigate volatile markets will ultimately benefit them, or at least put them in a more advantageous position.
Investors need to remember that any sort of action they take should put them one step closer to achieving specific goals. Blindly taking action just for the sake of saying “I did something” is a waste of time at best, and a cause of irreversible damage at worst.
Wrapping Up
Dealing with volatile markets is, unfortunately, something investors will need to do from time to time. Regardless of how investors feel about them, it’s never a matter of if, but when they will inevitably happen.
Although it’s impossible to predict when periods of volatility will happen, nor can anyone say how long they’ll last, this is largely inconsequential. That’s because periods of market frenzy almost always unfold the same way, and because of this, can also be handled more or less the same way too.
This doesn’t mean there’s a foolproof set of instructions that investors can follow, because such an elusive thing doesn’t exist. There are, however, several key principles that investors can abide by to help them find their way amidst times of unrest.
Volatile markets can prove to be a very stressful time, but can still be successfully navigated without too much difficulty if an investor knows what they’re doing.
