Periods of heightened volatility can make even experienced investors second-guess well-considered decisions. But the most damaging outcomes often stem from a handful of predictable behavioural mistakes: selling in a panic, focusing too much on macro forecasts rather than valuations, chasing what has worked most recently, and assuming the future will mirror the past.
Panic selling, the cardinal sin
Staying invested is crucial. As humans, our emotions are inherently tied to our investing behaviour, so it is natural to want to act when markets fall and an investment is under pressure. What investors often forget, however, is that the most widely known information is already reflected in prices.
Take March 2026 as an example. Following the escalation in the Middle East, there was evidence of panic selling at depressed levels in various markets across the globe. The problem is that when investors disinvest and move into cash, they often miss the subsequent rebound. Panic selling often means selling at the point where buying would actually have offered the better risk-reward trade-off, because markets frequently overreact and over-extrapolate negative news in the short term.
After selling, it is extremely difficult to reinvest at higher levels once the negative headlines have passed and markets have recovered. Investors often wait for a large pullback to reinvest, only to find that when it eventually comes (sometimes years later), asset prices are substantially higher than when they sold. Getting ‘trapped’ in cash can therefore be extremely damaging to long-term returns. Missing the market’s strongest days, which are often clustered around periods of maximum stress, can materially reduce longer-term performance.
Asking the wrong questions
When major news events dominate headlines and market noise is elevated, it is often less helpful to ask, ‘What is going to happen?’ than to ask, ‘What is already priced in?’
For investors, buying at depressed prices can offer a margin of safety. For a long period, for example, South African shares traded at a substantial discount to their history and other equity markets. Yet the prevailing narrative focused on a range of risks, including concerns about a shift towards more populist policies. In many cases, share prices were already discounting a poor outcome, meaning returns could be attractive if the eventual reality was simply ‘less bad’ than the market had priced.
This distinction is important. Investors can look at high-quality businesses and assume they are automatically good investments. The more relevant question is what expectations are embedded in the share price. A company priced for no growth that delivers even modest growth can perform exceptionally well. Conversely, shares priced for very high growth that deliver only moderate growth can decline sharply.
By way of example, in 2025 India’s GDP grew by 7.8% while South Africa’s grew by 1.1%. Yet India’s stock market was down 3% in US dollar terms, while South Africa’s stock market rose by almost 61% over the year. In other words, the Indian market was priced for near-perfection, and the South African market was priced for disappointment. It is a useful reminder that valuation matters, and that the historical correlation between GDP growth and stock market performance is low.
Chasing performance
Chasing performance is another common mistake in volatile markets. When an asset price rises quickly, it can attract more buyers simply because it has been going up. That additional demand pushes prices still higher, reinforcing the narrative that ‘money is being made’, often with little reference to underlying fundamentals.
Momentum-driven periods can be lucrative, but they raise an unavoidable question: who will buy from you when you decide to sell? A small price decline can cause momentum-driven buying to dry up. If there are no incremental buyers left, prices can fall sharply. These reversals tend to be most painful for investors who entered late in the cycle, just as valuations became stretched and risk was rising.
The behaviour of the gold price over the last six months provides an excellent illustration of this momentum-driven investment cycle.
Assuming the future will mirror the past
While there are fundamental truths that ultimately drive markets over the longer term, markets are adaptive and constantly evolve, making extrapolating past market behaviours and relationships into the future challenging. As an example, in 2021/22 investors learnt the painful lesson when they assumed US bonds would continue to hedge global equities, despite trading at historic low yields (i.e. these bonds were extremely expensive). It illustrates that valuation is a key determinant of not just future returns, but also how assets behave in different environments, both on a relative and absolute basis.
We see many investors using historic average correlations between assets to optimise portfolios. However, not only do correlations tend to converge during periods of stress, but as illustrated above, starting valuations can affect subsequent asset performance and behaviour materially. True diversification is about understanding assets’ economic exposures, their valuation, and how they are therefore likely to behave when markets are under pressure for various reasons. Rather than relying purely on history, we prefer to ensure assets we hold are attractive from a valuation perspective, and to use tailored scenario analysis and stress testing to build portfolios that are resilient across a range of outcomes.
Written by John Gilchrist, Chief Investment Officer at PSG Asset Management