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 good news, as Nelli points out, is that investors can take steps to potentially avoid such errors when volatility picks up. Nelli’s suggestions for weathering volatile times rationally include focusing on longer-term investment goals, portfolio diversification and regular portfolio rebalancing at set intervals.
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.