Keeping Your Cool When Volatility Heats Up

by Corbin Grillo

If you’ve followed financial markets for any meaningful length of time, you probably remember more than a few moments when your stomach sank a little. Even though we know volatility is an expected part of long-term investing, those periods can still be challenging. 

Downturns don’t just impact our account balances; they affect our psychological well-being too. When prices fall, our brain often perceives it as a genuine threat, not just numbers on a screen. 

Jason Zweig, the exceptional Wall Street Journal columnist, wrote a fantastic piece titled “This Is Your Brain on a Crashing Stock Market” in the midst of the 2020 bear market. In it, he cites several neuroscientists and psychologists who discuss how our typical thought patterns actually change during periods of stress. 

In the article, Peter Sokol-Hessner at the University of Denver says, “Stress is going to make investors less of who they are, an impoverished version of themselves… You have a decreased ability to use your previous experiences and knowledge to make smart choices in new settings.”  

Per Harvard University’s Elizabeth Phelps, “Any type of stress—mild, severe, chronic, acute—will impair your ability to think flexibly, to draw on the functions of the prefrontal cortex, to exert executive control.”  

Stress tends to exacerbate negative feelings. “As your threat sensitivity rises, you’re more likely to bias your predictions toward something bad happening,” according to cognitive neuroscientist Candace Rao of NYU Langone Health. 

In short, everything we know we should do to improve our chances of long-term success becomes more difficult.  

Tips to Avoid Making Poor, Biased Decisions During Periods of Uncertainty  

First, simply recognizing the potential biases in our thought process can be helpful. Understanding that our emotional state during market volatility is a normal, biologically driven response—not generally the foundation of a rational investment thesis—can help us avoid making decisions we may later regret. 

Second, history can also provide perspective. Every major market downturn feels unique in the moment. Investors are very good at pricing known risks; it’s the unknown that’s challenging. Almost by definition, future periods of volatility will be accompanied by these “unknown” risks. After all, if those risks were known in advance, they would likely already be reflected in market prices. While these periods often feel unprecedented, markets have repeatedly shown an ability to recover over time—rewarding those who remain patient. 

Finally, having a plan and the appropriate portfolio to go along with it is crucial. We can’t predict when volatility will come, but we can prepare for it. Proper planning can provide peace of mind when markets aren’t cooperating. 

The knowledge that your long-term goals are still achievable despite inevitable periods of market weakness can help investors stay disciplined. And a properly diversified portfolio is a key part of that plan. Diversified portfolios aren’t built for environments where everything is perfect; they’re built for the imperfect ones. Understanding how your investment allocation might perform in various market scenarios, and why it’s constructed the way it is, is essential for long-term success. 

One question to always ask yourself during turbulent markets is, “Has anything fundamentally changed about my situation and long-term goals?” Whether the answer is yes or no, and whether it requires any portfolio adjustments, is ultimately a personal judgment for each investor. But either way, staying cool in the moment will lead to better decision-making.