Market turbulence: how not to react

Market turbulence: how not to react

Alexander Joshi, London UK, Head of Behavioural Finance

All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

It’s been a turbulent time for markets this year, with the threat of trade wars, the potential end to US ‘exceptionalism’, worsening economic data, geopolitical tensions, and rapidly deteriorating consumer and market sentiment, to name a few factors. Investors have much to keep their eye on.

It’s more important than ever to keep calm and focus on reaching your long-term goals at such times. However, that’s easier said than done.

So, what actions and behaviours should investors try to avoid during such tough times, however strong the urge to the contrary? The answer lies in avoiding investment decisions that could harm long-term performance.

A first step is for investors to recognise whether they exhibit some of these tendencies. Once aware, what should they do next? Well, it’s the tried and tested suggestions, which centre on having the basic financial and behavioural building blocks in place.

By that, we mean the importance of a robust investment process, having a well-diversified portfolio, and adopting an approach, such as a core-satellite strategy, to protect and grow wealth with the bulk of the portfolio, while having the flexibility to capitalise on opportunities and mitigate risks in the short term through tactical positioning.

When market uncertainty rises and the prospect of losses enters the financial market discourse, investors often react by selling investments to de-risk their portfolios. A more conservative asset allocation (such as holding more cash and government bonds) might feel safe, but it can lock in lower long-term returns.

More gradual rebalancing or hedging, may be a more appropriate way to keep an eye on the long-term potential of the portfolio, while resting easier at night.

2. Attempting to time the market

Exiting the market altogether and waiting for clarity, as well as a better re-entry point, can seem like a sensible and attractive proposition. However, missing just a few of the best-performing days can significantly impact long-term returns. Markets are forward-looking and can rebound faster than investors anticipate.

Rather than exiting completely, consider maintaining a balanced approach to investing. Building a well-structured portfolio can help manage volatility, potentially reducing the need for drastic action.

3. Not taking tactical opportunities

Because of the way we are wired, losses have a larger impact on us than equally sized gains, and investors have a natural tendency to focus on the downside during turbulent periods. However, short-term opportunities can usually be found at such times for those willing to act tactically.

Adopting an approach that aligns with long-term goals while allowing the flexibility for short-term opportunities (such as when using a core-satellite approach) could help navigate turbulent times. For example, selectively increasing exposure to well-placed US stocks, rather than simply following a momentum trade into European stocks.

It’s also important for investors to remember that pessimistic market views can also be traded through products structured around them.

Such as with European stocks this year, when there is a significant shift in the market narrative and a period of strong performance, some investors follow the herd, assuming the rally will continue indefinitely.

It’s important to ensure that allocations are based on sound fundamentals, not recent price moves and sentiment, and are in line with your goals.

News cycles tend to exaggerate short-term investor concerns, and can exacerbate decisions driven by emotions and behavioural biases.

It’s important for investors to use their goals as the lens through which to view news and their own reactions to it, asking themselves if and to what extent it affects their ability to reach them. Following a robust, disciplined, rules-based investment process can remove, or at least temper, emotions from decision-making.

6. Checking the portfolio too frequently

Linked to the point above, the increased focus on the (short-term) news flow can induce investors to monitor their portfolio value more frequently. Given the increased volatility of returns over shorter-time horizons, this can amplify investors’ stress and the chances of making more impulsive decisions.

Setting structured intervals for portfolio reviews can help investors to stay focused on long-term objectives. The probability of seeing a gain in equities increases as the time horizon widens (see chart). This is true whether looking at a world index, or regionally, as we illustrate for the US with the S&P 500 and for Europe with the Stoxx 600.

Probability of positive US equity returns

The probability of positive return for the S&P 500 over selected time horizons since 1928 increases the longer the holding period

Sources: Bloomberg, Barclays Private Bank, March 2025

Probability of positive European equity returns

The probability of positive return for the STOXX 600 over selected time horizons since 1928 increases the longer the holding period

STOXX 600 probability of positive return over selected time horizons, 1987 – present

Periods of underperformance can lead investors to exit certain asset classes or regions. This might have short-term benefits, but it could harm the long-term asset allocation that was built for their individual goals and time horizon.

Having a well-diversified portfolio of several asset classes and geographies might sound like simple, boring advice, but it usually comes into its own in uncertain times. Diversified portfolios can provide smoother returns and enhance the risk-return trade-off.

8. Anchoring on arbitrary dates

Investors tend to benchmark their performance against a recent market high, the start of the year, or some other recent event. Perhaps even a new presidential term. This can lead to discontent with portfolio performance, and a focus on the short term.

Investors should remember that they have set long-term goals. It is unrealistic to expect a portfolio to outperform across all time periods, especially shorter ones.

The current market environment presents both risks and opportunities. Investors who can avoid behavioural pitfalls will be better positioned to meet their long-term goals. They should focus on staying invested, managing risk and identifying selective opportunities, rather than making knee-jerk decisions.

Discipline, diversification, and patience remain the foundations of successful investing — no matter the market environment.

As equity markets sell off in the midst of much policy uncertainty, find out what might lie ahead for the financial markets.