• It is important to always do your own research before making decisions about investing.      

• This article was produced 7 April 2025.  

• Past performance is not an indicator of future performance. 

 As investors are aware, we are once again navigating a period of major market volatility. This is not the first or last time any of us will encounter rocky market terrain. It’s important to know that investing during such periods is as much a psychological challenge as it is a financial one.  

When markets swing wildly, emotions can often take the wheel, influencing our decisions in ways that can lead to poor outcomes. That’s why understanding the psychology behind these reactions is essential for investors aiming to remain rational and committed to their long-term strategies, and why mental resilience can be a powerful asset to the individual investor. 

The psychology that holds us back when markets become volatile 

To understand investor psychology in periods of uncertainty, it’s helpful to understand some of the main cognitive biases at play. Maybe you recognise some of these in yourself or people you know. 

• The pain of loss  

At the core of investor behaviour during volatile times is what's known as ‘loss aversion’ – the tendency to feel the pain of losses more intensely than the pleasure of equivalent gains. Humans are wired to act based on loss aversion – for our ancestors it was an effective survival instinct at times. Nowadays, our inherent loss aversion is not always so useful to us.   

Research in behavioural finance, particularly by Daniel Kahneman and Amos Tversky, shows that losses can feel roughly twice as powerful as gains. In a falling market, this can prompt panic selling, even when underlying fundamentals haven’t changed. Investors may tell themselves they’re protecting capital, when in fact they’re locking in losses and potentially missing out on future recoveries. 

• Short-term thinking and the fear of missing out 

Being solely focused on what’s just recently happened, also known as ‘recency bias’, plays a significant role in our decision-making during times of volatility. When markets are tumbling, investors have a natural tendency to overemphasise more recent events and assume recent negative trends will continue. This can erode confidence in previously sound investment strategies and lead to reactive decisions – like moving everything to cash at exactly the wrong time. 
 
On the other hand, when volatile markets rise, this can trigger the fear of missing out (“FOMO”), prompting investors to follow the crowd and jump in late to trending investments. This behaviour, driven by herd mentality, often ends in disappointment when markets eventually correct, and overvaluation becomes apparent. 

Maintaining discipline and acting from resilience 

To counter reactive and emotional impulses, successful investors often implement structures to maintain discipline. This could include setting a clear asset allocation, scheduling regular portfolio rebalancing, and maintaining routine reviews of investment goals and timeframes. Staying focused on long-term objectives, rather than reacting to short-term noise, is crucial. 

Some strategies and techniques to consider: 

• Mindfulness, journalling investment decisions and taking the time to thoroughly review historical market data can help put current volatility in context and turn the volume down on some of your immediate and reactive thoughts. Markets have historically recovered from even the sharpest downturns. Remembering this can help reinforce the value of patience and staying on the course. Past performance is not an indicator of future performance. 

   

• Re-commit to your investing goals and purpose. Remind yourself why you started investing in the first place. It’s likely that you knew you would encounter shifts and volatility throughout your investing journey – for long-term investors, this comes with the territory. Try to zoom out of the daily and weekly fluctuations.  

  
  

• Many investors find that a predictable approach like dollar-cost-averaging is able to remove some of the emotion from investing decisions. If you feel your investment needs warrant a nuanced discussion, it’s always best to seek professional financial advice.  

  
  

• For other investors, a ‘bucketing’ strategy can be an effective way to ride out a market downturn while maintaining a sense of control and balancing risk. It’s popular among those approaching retirement, as well as those seeking a simplified but comprehensive way to manage assets and investments. Bucketing can provide a way to separate higher-risk investment allocations from other assets such as cash savings, bonds and term deposits. Take the time to review your current financial situation in detail before designing your personal bucket strategy to make sure that it will meet your near-term and long-term needs effectively. 

Ultimately, volatile markets test more than just portfolios – they test temperament. Investors who are aware of their emotional triggers and cognitive biases that come with volatility are far better placed to stay calm and make clear-headed decisions. In a world full of uncertainty, mental resilience might just be an investor’s greatest asset.