It Feels Different This Time—but It Probably Isn’t
No matter how often market volatility strikes, behavior can be hard to manage with amplified uncertainty.
By Ryan O. Murphy, Global Head of Behavioural Insights, and Danielle Labotka, Behavioural Scientist
Life—and investing—comes with its share of unpleasant realities. One of the most infamous of these is behind the latest reality that is roiling the markets: taxes.
Tariffs are taxes on American consumers. They’re a blunt policy tool, often ill-suited for addressing complex real-world problems. The administration’s steep and reckless tariffs have sent global markets into upheaval and have been termed “a self-inflicted catastrophe” by Morningstar’s senior US economist.
For investors accustomed to dealing with unpleasant facts, self-inflicted damage is particularly hard to understand and endure. Volatility in markets is expected and normal, but the current situation feels like neither.
Have We Learned Anything From Previous Market Volatility?
One would hope previous experiences with market volatility would prepare us for the next round.
After all, once we’ve heard an impactful story, we don’t tend to forget how it ends. However, it can be difficult to see how each round of volatility is the same story of typical market patterns when the inciting events seem so different. For example, in 2020, investors knew intellectually that they (and the markets) had survived the last round of market volatility, but they were sent reeling because they had never faced pandemic-fueled volatility before.
Because every round of volatility feels so different, we try to reconstruct the narrative when we encounter it. So, we start by asking, “Why is this happening?” and “What should I do?”
There are always different answers to the first question; some reasons for volatility are harder to make sense of than others. This “self-inflicted catastrophe” might be the hardest to swallow yet, but that doesn’t change the answer to, “What should I do?”
“For investors accustomed to dealing with unpleasant facts, self-inflicted damage is particularly hard to understand and endure. Volatility in markets is expected and normal, but the current situation feels like neither.”
Our Advice to Investors: Do What Feels Unnatural
Regardless of how different it feels this time, our guidance to investors remains the same:
- block out the noise,
- focus on your goals and what you have control over,
- don’t try to predict or time the markets, and
- stay the course.
From the standpoint of behavioral science, we know being an investor is hard. It requires people to do at least two somewhat unnatural things: delay gratification by saving instead of spending and embrace uncertainty.
From the standpoint of behavioral science, we know being an investor is hard. It requires people to do at least two somewhat unnatural things: delay gratification by saving instead of spending and embrace uncertainty.
Humans are not naturally wired for either of these approaches, so this requires practice and discipline. But although unnatural, saving and fortitude pay off in the long run as investors can build up wealth and make their money work for them.
Sure, the ride is not always smooth. But over the long run, economies grow, technology and trade develop, and an increasingly interconnected system emerges that creates widespread (but not evenly distributed) wealth with widespread benefits. Huge tax increases are disruptive to that progress and have understandably shaken investors’ confidence, creating the increase in uncertainty. (The last time a de facto massive national tax increase was tried in the US was in 1933, and its effects just deepened and prolonged the Great Depression, disrupting economic progress, to say the least.)
Yet, our guidance stands the same as ever because even though it feels different this time, it likely is not. Market volatility is inherent in investing, regardless of its source. We’ve endured volatility before, and evidence repeatedly shows that trying to time the market by making exits and entries underperforms staying the course.
Right now, investors are asking themselves difficult questions. What is the administration thinking? How will the markets and other countries react? What is a narrative that ties all of this together? What will happen next? People want to understand the story they’re in so they can feel confident about their actions. Here, the reality may be that this story is not as simple as we’d like, but in any case, the best action is to hold tight.
As for what’s going to happen next, we don’t know. Nor does anyone else, really. But it’s worth remembering that good investing is not about having a crystal ball and knowing what will happen next.
Investing is, as it always has been, about having discipline, finding value, seeking diversification, and having the tenacity to endure the inescapable uncertainty of investing and take a long-term perspective.
We don’t know exactly how artificial intelligence technology will disrupt labor markets, or how climate change will affect weather and food production, or how a nascent virus mutation will manifest and disturb transportation networks, or even what the current administration will do next. But the long-term principles of investing remain the same, even in the face of amplified (and self-inflicted) uncertainty.
