Unless you’ve just returned from a silent retreat, you’ll know that we're experiencing a high degree of stock market turbulence. Markets fell sharply in the United States on Thursday after President Trump’s announcement of new tariffs on US imports, and it’s a similar story around the world.
As I write this, we’re in the eye of the storm, with commentators warning that the sell-off is far from over. The financial headlines are peppered with scary words like “mayhem”, “rout” and “bloodbath”.
It’s a natural reaction to feel uneasy when markets fall sharply. Our brains react as if we're facing a physical threat. The amygdala, the brain’s fear centre, activates the fight-or-flight response, triggering the release of cortisol and adrenaline.
This can cause anxiety, increased heart rate, and impulsive decision making. At the same time, the pre-frontal cortex, responsible for rational thinking, may be overridden by emotions, leading to panic-driven decisions we may well come to regret.
The evidence shows us that, from an investment perspective, the best thing to do in these situations is usually nothing at all. Generally our long-term interests are best served by ignoring the noise and resisting the temptation to act.
Market falls are inevitable
I know, it’s simple advice that’s hard to follow. I’ve been there myself. It can be soul-destroying to see your portfolio suddenly fall in value. But I can honestly say that market falls no longer bother me at all. Why not? Because I’ve come to learn that, despite our tendency to catastrophise, downturns are an inevitable feature of investing in equities.
It is, in fact, enduring market downturns that we, as investors, are effectively rewarded for. Without uncertainty, there wouldn’t even be an equity premium. No pain, no gain.
Of course, it’s hard to stay calm and rational when you’re in the thick of it. Evolution has favoured quick, emotional responses to danger over stoic acceptance.
For me, the answer is to force yourself to see the bigger picture and to focus on the positives. Here are some examples:
1. This may not be a full-scale crash
When markets have fallen sharply, commentators often talk of crashes, and compare what’s happening now to crashes in the past. But full-on crashes — in other words, declines of 20% or more — are relatively rare.
2. Markets can recover quickly
Markets can and do recover remarkably quickly. Yes, bear markets can last for a long time, but market volatility is often over within a few weeks or even days. A month or two from now, you may have forgotten all about it.
3. Much can change in 24 hours
The market’s worst days are often immediately followed by the best. That’s the nature of market volatility. Things can look very different within just 24 hours. And being invested on the best days makes a huge difference to your eventual returns.
4. Part of your portfolio may have gone up
There’s no escaping the fact that equities have fallen in every sector of the economy and every region of the world over the last two days. But, when equities fall, so-called “safe haven” assets tend to rise in value. For instance, government bonds in the US, the UK and the rest of Europe have rallied strongly.
5. The make-up of your portfolio hasn’t changed
Yes, its value has been marked down, but your portfolio hasn’t changed. You still own a share in the same companies you did before prices fell. For those companies, it’s business as usual. Their aim is still to maximise returns for shareholders, and their underlying value is unaffected by market sentiment.
6. Markets may have over-reacted
There is a tendency for equity markets to over-react to bad news. Very often, it’s the uncertainty the news creates rather than the news itself that causes market turmoil. Yes, markets may well fall further. It’s quite possible, though, that as the impact of Trump’s tariff announcement becomes clearer, they will start to recover.
7. Recessions aren’t the end of the world
One of the reasons why markets are currently so volatile is that many commentators are predicting a recession. What if they’re correct? Well, from an investment perspective, it may be less disastrous than you think. Why? Because markets are forward-looking. The likelihood of a recession may already be priced in. Also, because they act as a natural reset, recessions can have long-term economic benefits.
8. Capitalism has proved very resilient
Throughout history, capitalism has shown itself to be extremely resilient. Markets have fallen many, many times, but eventually they have almost always recovered, even after world wars. Staying invested puts you in the best possible position to benefit from a recovery when it comes.
9. Everything’s on sale!
Think of a market decline as a supermarket sale. When you walk into your local store and discover that everything is cheaper than last time, you don’t walk out. You’re grateful that your grocery budget buys you more than it did. If anything, it’s a cause for celebration. Exactly the same principle applies to equity investing.
We’re all going through it
Again, none of this is intended to downplay any discomfort you may be felling as a result of recent market developments. But it’s important to maintain a healthy perspective.
There’s a danger, at times like these, to think that it’s just us who are affected. It may seem an obvious thing to say, but we can forget when a market sell-off hits us hard, that hundreds of millions of investors around the world are impacted too. So don’t take it personally.
Perhaps you recently invested a large sum and feel as though you’ve made a mistake. But you probably didn’t. You paid what was at the time a fair market price. With the benefit of hindsight, it all looks so obvious. But market crashes and corrections are almost impossible to predict with any accuracy.
Some practical tips
Finally, here are some practical tips to help you stay calm over the coming day, weeks, or however long the current market turmoil lasts.
Don’t keep checking your portfolio. Stop watching financial news. And stop paying attention to people making predictions: nobody knows what will happen next.
Stay focused on your long-term investment goals. If you’re tempted to take action, by reducing your equity exposure, for example, always sleep on it first. And if you’re in doubt, speak to a financial adviser.
Finally, distract yourself. As the Nobel Prize-winning behavioural finance expert Daniel Kahneman once wrote, "Nothing in life is as important as you think it is while you are thinking about it.”
So just stop thinking about it. Do something to get your mind off it. Try getting stuck into a good book, for instance. Better still, take a long walk in nature. Being in a vast, open space can make worries feel smaller, helping you think more clearly and feel more at ease.
For more information about staying disciplined amid market turmoil you might want to watch our video series, Conquer Your Fear of the Stock of the Stock Market.DO YOU HAVE A PLAN?
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