Navigating Market Volatility
With markets down double digits since their mid-February peaks, many investors are feeling uneasy. Some are trying to make sense of what’s happening, while others are reacting emotionally. Regardless of how one feels about the broader economic and political landscape, most people don’t enjoy seeing their portfolios in the red.
While I remain hopeful that recent policy shifts could have long-term benefits, predicting market movements—especially in volatile times—is impossible. As humans, we crave certainty, yet markets are inherently uncertain. This period of turbulence only magnifies that reality.
At times like these, I think about the late Daniel Kahneman, the Nobel laureate in Economic Sciences known for his groundbreaking work on decision-making and behavioral economics. In Thinking, Fast and Slow, he explains the two systems of thinking that shape our judgment:
System 1 (Fast Thinking): Automatic, emotional, and intuitive. It helps us react quickly in familiar situations but can lead to errors when faced with uncertainty.
System 2 (Slow Thinking): Deliberate, logical, and effortful. It helps us analyze complex situations, weigh evidence, and make well-reasoned decisions.
In investing, we must rely primarily on System 2 to make sound decisions. The best time to develop an investment strategy is when markets are calm—when we can think logically, set long-term goals, and avoid emotional reactions. A well-structured plan allows us to stay the course even in turbulent markets.
In contrast, System 1, while essential for survival, often works against us in investing. Imagine hiking in the woods and suddenly coming face-to-face with a bear. Your System 1 takes over instantly—your heart races, adrenaline surges, and you either flee or freeze. No time for analysis, just raw instinct.
This same system kicks in when we see market volatility. Turning on MSNBC or checking your brokerage account, you might feel panic. Questions flood your mind: How much have I lost? How much more will I lose? These feelings can lead to impulsive decisions—panic selling in a downturn or chasing speculative trends in a bull market.
So how do we navigate market turbulence? I would guess that Kahneman might suggest a few key strategies:
Pre-Commit to a Plan: The best defense against emotional decision-making is a well-thought-out strategy created during calmer times. We can control our process, not the market’s outcome.
Avoid Herd Mentality: Fear spreads quickly. Many investors overreact to market swings because they see others doing the same. Instead, focus on your own long-term objectives. Surround yourself with level-headed thinkers, not those in panic mode.
Recognize System 1’s Influence: Simply being aware of our instinctive reactions can help prevent impulsive decisions. Volatility is a normal part of investing—expect it, but don’t let it dictate your choices.
Recognizing our emotional responses doesn’t mean we stop feeling them. Even as a professional investor, moments like these aren’t easy for me either! But the key is deciding not to react. There is no bear coming for you. The best decisions happen when you remain calm and trust the thoughtful, deliberate System 2 approach that guided your investment strategy in the first place.