Investing Rationally if Markets Get Erratic

Market volatility is likely to pick up for a number of reasons, including increasing investor anxiety ahead of the Federal Reserve’s September meeting.

As a result, investors may be prone to three bad investing behaviors during periods of higher market volatility.

1. Blindly following others when it comes to making investment decisions. When uncertainty is high, as it is when markets are volatile, investors are more prone to copy the positions of other market participants, who they feel may have better quality information. This kind of behavior can lead to falling victim to market bubbles and crashes.

2. Trading excessively.  In general, the higher the uncertainty and volatility in the markets, the harder it is to infer whether one’s own past investment decisions were correct. During volatile periods, investors may remain overconfident longer than if they were able to more clearly learn their true investing skill level. As such, amid volatility, they may continue to trade excessively longer than they otherwise might, potentially hurting portfolio performance net of fees.

3. Remaining paralyzed in the status quo. While some individuals may trade excessively during volatile times, others, especially those with little investment experience and little confidence in their own investing abilities, may not wish to act at all. This is because they may fear potential losses, which loom larger during times of uncertainty, and the psychological pain from regret over any poor investment decisions.

The best suggestions for weathering volatile times rationally include focusing on longer-term investment goals, portfolio diversification and regular portfolio rebalancing at set intervals.

Source:  Russ Koesterich, CFA, iShares Global Chief Investment Strategist.

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

 

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