CapitalTime

Articles on investing and capital management, with a quantitative focus.

Some Lessons From Volatile Markets

2025-04-10

I would like to share some lessons I learned from previous market volatility (especially 2007-2008 and 2020). In recent days, stocks have made some of the largest 1-day and 2-day moves in decades.

For proper advice, speak with a financial advisor. This web site is a personal investing journal, and I’m not a professional.

(1) Stick to your plan. Don’t improvise!

This is not the time to improvise. Your existing investment plan (e.g. asset allocation) is your guide. Assuming that you used back-tests and historical studies to arrive at this plan, you have already considered a wide range of market conditions.

Just stick with the plan, and try to not make any big changes.

If you see a need to revise your existing plan, don’t make any hasty decisions. Think it through, and perhaps bounce your ideas off a financial advisor.

(2) Trading in volatile markets is dangerous

Placing stock or ETF trades in super-volatile, fast-moving markets is dangerous. “Market” order types are particularly dangerous, so always use “Limit” orders. During periods of extreme volume and extreme volatility, you might find that orders don’t fill very quickly, then fill at bad prices. The price quotes may not be reliable. Your brokerage’s IT infrastructure may be overloaded with customer activity, and might be unresponsive at times.

(3) Daily price movements are meaningless

I’m fascinated by market movements, and enjoy looking at how prices move on turbulent days. However, I keep reminding myself that the single day’s price movements are basically meaningless.

When markets are extremely volatile, they can swing around like crazy on any given day (or week). If you are trying to get a grasp on how something is performing, I think it’s more helpful to look at longer term measures such as Year to Date (YTD) or 1 year performance.

(4) Tune out people who get too excited

There’s a natural human tendency to react to extreme market movements. Large drops tend to trigger panic, and large increases tend to trigger greed or excitement. Some of your friends, family and colleagues will have emotional reactions and start adjusting their own portfolios.

Don’t let this emotional activity rub off on you.

The news media and financial press is just as bad! There will be analysts and other personalities who do all kinds of things in response to the market volatility.

(5) Trying to “play” the movements is a bad idea

I’m not a financial professional, so these are just my opinions based on ~ 25 years of investing experience.

Unfortunately, there are many professionals (with certifications and credentials) who will advise people to trade the market, time the market, and take advantage of price swings. You will find some of these people on media outlets such as CNBC, which is notorious for giving airtime to active managers and traders.

Some of these personalities are very wealthy people, and may truly believe that they are capable of “timing the market”. Some of them have a high status, representing Wall Street firms or hedge funds.

However, I haven’t seen any solid evidence that people can reliably time the market. I have watched these personalities for many years, and have noticed that they have terrible track records. In their attempts to “play” market movements, they might successfully trade the first event, but then fail horribly on the next two events. After a few failures, you will never see or hear from them again.

Just because someone is wealthy, or runs a hedge fund, does not mean they are capable of timing the market. Just look back at Warren Buffett’s famous bet against a group of top hedge funds. Buffett allowed the hedge fund team to choose several top managers, who claim they have the ability to do better than a plain market index. The performance of these managers after 10 years was embarrassingly poor, versus a plain index fund.

— Jem Berkes