Global share markets, including in Australia, have recorded large swings ever since Donald Trump released his “liberation day” tariff plans.
If you are anxious about the volatile market and the impact it’s having on your investment or retirement portfolio, here are some common human reactions that need to be managed to avoid making a volatile situation worse.
Don’t freeze in fear
Investors are grappling with a fundamental question over whether the market ruptures are a temporary setback or a structural shift, which means shares need to be completely repriced.
While investors will come to different conclusions, Elise Payzan-LeNestour, professor of finance at the UNSW Business School, recommends assessing what any dent in your investment performance means to you.
“Your first reaction should be to adopt a cognitive perspective and assess what does it mean given my situation, my investment horizon,” says Payzan-LeNestour, who researches how people perceive and react to financial risks.
She says if you need to access your investment relatively soon, such as for retirement or a home deposit, you may need to act fast.
“In your situation, hesitation is going to be inherently costly, and so reacting swiftly is just about everything,” she says.
“Don’t freeze.”
While markets can recover quickly, as seen in the quick rebound after the Covid sell-off, the lag can vary greatly.
It took 15 years for the Nasdaq to recover its highs after the tech wreck of 2000, and more than 33 years for the Nikkei to get back to levels reached in 1990, when the Japanese asset price bubble finally burst.
Investment firms have warned there are still significant risks to the global economy, even after Donald Trump’s decision to pause steep tariffs against most nations ignited a share market rally.
Multinational investment bank UBS said on Thursday the rebound in global markets offered investors an opportunity to “take stock, diversify portfolios”, and prepare for market volatility.
Don’t let panic steer the wheel
On the flip side, Payzan-LeNestour says those with portfolios that don’t need to be accessed any time soon should probably stop looking at their account balances.
“Their job is to exert restraint, which is extremely challenging from a psychological point of view, but don’t let panic steer the wheel,” she says.
“That’s why blissful ignorance is key, because if you track your portfolio every day, it’s highly likely that you won’t manage to endure.”
The abundance of pricing information in the digital age has given people the ability to constantly track their wealth, including super balances, rather than wait for periodic paper updates.
This has heightened both positive and negative emotions tied to short-term market movements.
Phillip Bures, a financial planner with Nestworth Financial Strategists, says the investors most likely to be spooked are those with less experience and those without a thought-out strategy in place.
Don’t mistake a trap for a bargain
When investors see the size of their account fall, there’s a temptation to chase losses through wild trading.
Financial adviser Gareth Colgan, the managing director at Wellbeing Wealth, says the human brain is “not hardwired to remain rational at times like these”, but he adds that the most successful investors are able to stay calm.
Colgan says just as people shouldn’t flock to the market when it’s running really hot, the same applies when markets crash and “everyone’s losing their minds”.
“Investment, like a market cycle, is an emotional rollercoaster,” he says.
“Investors who are trying to remain rational, and be prudent, [and] buy assets when they represent good value and not follow the herd type of mentality – they will do very well from just riding through these market cycles.”
Some investors will make the mistake of buying high and selling low. Others will try to trade themselves out of trouble by doubling down as markets fall– not always a terrific strategy, according to investment firms.
The chief investment strategist at Saxo, Charu Chanana, says investors should seek investments that are “fundamentally strong”, showing signs of healthy profits, and stable cashflow.
“Buying the dip is one of the oldest instincts in investing – but when markets are being hit by policy shocks, forced selling, and macro uncertainty, it can be hard to tell a bargain from a trap,” Chanana says.
The chief economist at Sydney-based Betashares, David Bassanese, says the rebound in share prices on Thursday could prove to be a “cruel bear market rally” given the ongoing risks to the global economy.
A bear market rally refers to a temporary lift in stock prices in an otherwise falling market.
Don’t assume you know what’s coming
The current market chaos, led by fast-paced policy changes by Trump, is a good reminder that it’s very difficult to pre-empt market movements.
Even Deutsche Bank, which said earlier this week that the Reserve Bank would cut rates by a jumbo half percentage point in May, changed its view hours after Trump unveiled the pause on tariffs.
Andrew Grant, a behavioural finance expert from the University of Sydney, says most investors should be taking a long-term approach to their finances, as opposed to making short-term bets.
“Generally speaking, knowing that you probably don’t know a lot about what’s going to happen is the best approach,” says Grant.
“Thinking that you know more than people who are trading professionally and trying to second guess what everyone else is going to do is probably not a sensible strategy.
“A lot of people can handle risk when things are going well, but not when things are going badly.”
