Nine Things that Happen to Investors When Volatility Increases

When prices correct in the stock market and volatility increases, investors tend to veer off course in a bunch of ways. Here’s a list of nine things that happen to investors when price volatility increases.

1. Emotional Volatility Increases – Investors are a little irrational even during periods of relative calm. That’s the behavior gap. But during periods of increased price volatility, investors become basket cases and emotional volatility increases. Extreme mood swings occur like a roller coaster – highest peaks to the lowest valleys. I put this one first because it is involved with most of the rest of the list.

2. Bottom Callers Come Out of the Woodwork – The market is off 600 and rises 100 and all of a sudden traders and pundits come out of the woodwork calling bottoms based on gut feeling or lines on a chart etc. “The market is going to close green today.” If the market closes green, it was happenstance and you were lucky – not because you’re prescient. This is egocentricity under stress and it’s a b*tch.

3. Investors Respond to Noise – Noise increases. A lot. Rumors come out of nowhere and are amplified across media. I call this The Fog of Volatility. Stressed participants latch onto the noise, share it, and make buy/sell decisions based on it.

4. Risky Market Behaviors Increase – Poker players call this tilt. It is a reflection of loss aversion within the domain of losses. Traders increase risk to try to get even against rational judgment, which stress has impeded. This happens more with traders than long term investors.

5. Long Term Investors Capitulate – Meanwhile, long term investors sell after most of the damage has been done and this is what capitulation is made of. If you have a long term savings or dollar cost average plan and suddenly you sell everything because you’re in pain, whelp, that’s capitulation. The question then becomes, when do you get back in?

6. People Drink Too Much – The stress gets to you and so what do you do – go out and damage your mind and body even more by serving it poison. Feels great until tomorrow’s opening bell when you’re less sharp than you can and need to be.

7. People Lose Sleep – This one goes with 6 above. Besides drinking too much, some lose sleep. This is another maladaptive symptom of stress. Poor sleep negatively affects executive cognitive functioning which you need to make rational choices during uncertainty.

8. You Say Stupid Things – Volatility can affect your relationships and the way you behave away from the market. You bring that stress home and unload on a loved one. Not a great look.

9. Misattribution Increases – Investors make up ridiculous reasons to explain why they are losing. This is otherwise known as Excuses 101.

There’s more and maybe I’ll add to this post but I wanted to get it out there while we are in the thick of it.

One last thing – there’s really not much I can say here that will help anybody with any of this stuff so I don’t really have advice. If you can avoid some of the stuff you can control, fantastic. Sorry I don’t have a secret solution or advice.

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By Phil