John Gilchrist | Chief Investment Officer | PSG Asset Management | mail me |
Periods of heightened volatility can make even experienced investors second-guess well-considered decisions. However, the most damaging outcomes often result from a handful of predictable behavioural mistakes.
These include panic selling, focusing too heavily on macroeconomic forecasts instead of valuations, chasing recent winners and assuming the future will mirror the past. Understanding these behaviours is essential when investing in volatile markets.
Panic selling, the cardinal sin
Staying invested is crucial. Human emotions naturally influence investing behaviour. Consequently, many investors feel compelled to act when markets fall or investments come under pressure. However, investors often forget that prices already reflect the most widely known information.
Take March 2026 as an example. Following the escalation in the Middle East, many markets around the world experienced evidence of panic selling at depressed price levels. The problem is that investors who sell and move into cash often miss the recovery that follows. Panic selling frequently occurs precisely when buying would have offered the better risk-reward opportunity. Markets often overreact and overestimate the long-term impact of negative news during periods of uncertainty.
After selling, investors usually find it extremely difficult to re-enter the market at higher prices once negative headlines fade and markets recover. Instead, many wait for another significant pullback before reinvesting.
Unfortunately, when that correction eventually arrives, sometimes years later, asset prices are often substantially higher than where they originally sold. Becoming trapped in cash can therefore severely damage long-term investment returns. Missing the market’s strongest trading days, which often occur during periods of maximum stress, can significantly reduce long-term performance.
This is one of the biggest risks of investing in volatile markets without a disciplined strategy.
Asking the wrong questions
When major news events dominate headlines and market uncertainty increases, asking “What is going to happen?” is often less helpful than asking, “What has the market already priced in?”
For investors, buying quality assets at depressed prices can provide an important margin of safety. For an extended period, South African equities traded at substantial discounts relative to both their own history and other global equity markets. During that time, however, the dominant narrative focused on risks such as the possibility of more populist policy shifts. In many cases, share prices had already discounted those negative outcomes. Consequently, returns became attractive if reality simply proved less negative than investors expected.
This distinction matters. Investors often assume that high-quality businesses automatically make good investments. However, the more important question is what expectations current share prices already reflect. A company priced for no growth can perform exceptionally well if it delivers even modest growth. Conversely, a company priced for rapid growth can disappoint investors if it achieves only moderate growth.
The comparison between India and South Africa during 2025 illustrates this point. India’s GDP grew by 7.8%, while South Africa’s economy expanded by only 1.1%. Despite this difference, India’s stock market declined by 3% in US dollar terms. Meanwhile, South Africa’s stock market rose by almost 61% during the year. In other words, investors had priced the Indian market for near-perfect outcomes, while they had priced the South African market for disappointment.
This example reminds us that valuations matter and that historical correlations between GDP growth and stock market performance remain relatively weak. These lessons remain especially valuable when investing in volatile markets.
Chasing performance
Chasing recent performance represents another common mistake during volatile market conditions. When asset prices rise rapidly, they often attract additional buyers simply because prices continue increasing. That growing demand then pushes prices even higher, reinforcing the perception that easy profits are available. Unfortunately, this frequently happens without sufficient attention to underlying business fundamentals.
Momentum-driven markets can certainly generate attractive returns. However, they also raise an unavoidable question: who will buy from you when you eventually decide to sell? Even a modest decline can quickly reduce momentum-driven demand. If no new buyers remain, prices can fall sharply. These reversals often hurt investors who entered the market late, just as valuations became stretched and investment risks increased.
The behaviour of gold prices during the past six months provides an excellent illustration of this momentum-driven investment cycle.
Assuming the future will mirror the past
Although certain fundamental principles continue to drive markets over the long term, markets constantly adapt and evolve. Consequently, investors should avoid assuming that historical market relationships will continue unchanged into the future.
For example, during 2021 and 2022, many investors learned a painful lesson after assuming US government bonds would continue protecting global equity portfolios. At the time, however, bond yields had already reached historically low levels, making those bonds extremely expensive.
The experience demonstrated that valuations influence not only future returns but also how different asset classes behave under changing market conditions.
Many investors continue using historical average correlations between asset classes when constructing portfolios. However, correlations often converge during periods of market stress. Furthermore, as the previous example demonstrates, starting valuations can materially influence both future performance and asset behaviour. True diversification, therefore, requires understanding the economic drivers behind each asset class, assessing current valuations, and evaluating how assets are likely to perform under different stress scenarios.
Rather than relying exclusively on historical relationships, we prefer investing in assets that remain attractive from a valuation perspective. We also use tailored scenario analysis and stress testing to build resilient portfolios capable of performing across a wide range of possible outcomes. This disciplined approach provides a stronger foundation for investing in volatile markets over the long term.
