Market volatility, emotions and your investments
By Jason Crumley 14 February 2022 4 min read
After a jittery start to the year due in part to the COVID-19 Omicron variant and persistent fears around inflation and potential rate hikes, investors are grappling with additional uncertainties as markets face another threat from political tension overseas.
As the United States responds to Russia’s military action on Ukraine’s borders and the escalating tensions in the region, other global leaders are also posturing as they discuss the threat of Russian troops invading Ukraine.
A range of emotions can surface in the face of geopolitical uncertainty, especially when accompanied with market volatility. Though a natural response, strong emotions, such as fear, can heavily influence decision making, which may lead to undesirable outcomes.
Having a better understanding of your emotions in response to market volatility and remaining focused on your goals is often the best defense from making well-intentioned decisions that may be a detriment to your investment success.
The volatility of emotions and the markets
Major events, such as international conflict, can lead to market volatility and impact investors in a variety of ways. An emotional response can lead to a strong desire to take action as we try to digest news headlines and their potential market impacts.
Looking back over the past few decades, there has been no shortage of major news events that have impacted markets and emotions in different ways. In the graphic below, we highlight a selection of financial, geopolitical and economic events over the years and their consequent reaction in the markets.
S&P/TSX Composite Index
- Iraq War (2003)
- Hurricane Katrina and Rita (2005)
- Financial crisis (2008) and subsequent quantitative easing to stimulate the economy
- Arab Spring (2010)
- Flash crash (May 6, 2010)
- US debt ceiling crisis (2011)
- Oil price collapse (2014)
- Greek debt crisis (2015)
- Brexit (June 2016)
- US trade war with China (2016)
- COVID crash (2020)
Though many of these events differed significantly from each other, one attribute they shared was their ability to conjure up strong emotions among investors. Additionally, they all garnered wide news coverage causing many investors to try and determine the potential market impacts and implications to their own investment portfolios.
Looking back at the historical performance of the broad Canadian market index over the past two decades, some events had more of a market impact than others due in part to the real or perceived impact on individual companies within the index. The market impacts of some events have been significant, like the global financial crisis of 2008, and the COVID-19 pandemic. Others, like the 2014 oil price crash, were more localized to particular regional economies and sectors such as Alberta and energy companies.
When looking back at historical events, it's important to remember they did not occur in a vacuum and would have been accompanied by a myriad of other influencing factors such as economic actions or government policy shifts. It becomes difficult, even for those with extensive economic backgrounds, to determine the impact of an event on various regional or global economies and how such impacts may affect stock prices. It’s easy to relate this to the geopolitical events occurring in Ukraine and speculate about the potential economic outcomes, including what could happen to the European natural gas supply or global oil markets. But while the events in Ukraine may cause short- to medium-term variations in the markets, it’s important to keep focused on your longer-term goals.
For those invested in a suitable portfolio aligned with their long-term goals, the best course of action is to ignore the emotional impulse to make investment changes in response to news headlines. In looking at the longer-term picture, the broad market overcame even the most negative events and continued to climb higher, rewarding patient investors. Similar to the waves of ups and downs in the market, our emotions can experience similar ebbs and flows.
Remaining focused on your goals
So how exactly do you ignore the urge to react to market headlines? Having a financial plan can certainly help by setting out a path to achieving your desired financial goals. Working with an advisor can also help keep you on track during periods of market turbulence.
Reviewing your financial plan provides peace of mind by reminding you of the preparations you’ve made for such periods of volatility. Your plan will likely include a diversified portfolio that is aligned with your goals and personal circumstances. Diversification helps mitigate (but not eliminate) volatility and includes multiple asset classes across a variety of geographic and economic sectors. Such a portfolio is constructed with the knowledge that uncertainty and volatility are inevitable and a disciplined approach is the best option to provide resiliency.
Unforeseen events will continue to impact your investment portfolio, particularly in the short term. These events can be regional or global in nature and can have a wide range of potential outcomes and market implications—none of which can be accurately predicted. While we all crave certainty, we must accept that uncertainty and volatility is the unavoidable cost for meaningful long-term returns. Having an awareness of your natural emotional responses and choosing to remain focused on what you can actually control is crucial to avoid making decisions that may not be aligned with your long-term financial goals.
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