It’s 8:30am. The index is down sharply, the headlines are unhelpful, and one of your biggest holdings is suddenly off 7% despite no obvious company news. Volatility has returned. This is the moment a lack of process can destroy you.
Volatility compresses time and makes decisions that ought to be part of a long-term strategy feel like something requiring an urgent response. It makes you want to do something, anything, to regain control. If you don’t have a strategy, your next decisions are going to be defined by emotion, noise, and a desperate attempt to “follow the herd”.
In moments like this, I find it help to reframe things.
Volatility isn’t a failure of the markets, it’s a feature. It’s the visible consequence of millions of participants repricing the future in real time, based on incomplete information, changing incentives, and genuine uncertainty. Markets aren’t just valuation machines, they’re also auctions. And auctions move.
Your job as a portfolio manager isn’t to eliminate volatility. Your job is to build a portfolio and a decision-making system that can function inside it.
Your job isn’t to eliminate volatility. It’s to use it.
Some investors speak as though a good portfolio is one that feels calm. But that often requires one of three compromises:
- Hold too much cash and miss compounding.
- Own “defensive” assets at the wrong price, confusing stability with safety.
- Over-diversify into mediocrity, so nothing goes wrong because nothing matters.
A well-built long-term portfolio aims for something different – Resilience and Readiness:
- Resilience: you can stay solvent, stay invested, and avoid forced selling.
- Readiness: you can act when prices dislocate from long-term value.
In other words, volatility is only a problem if it causes you to react poorly. If you can remain rational when others can’t, volatility becomes a source of opportunity rather than a source of damage.
Fear of volatility doesn’t protect you. It paralyses you.
The most common mistake in volatile markets isn’t “buying the top”, it’s what happens afterwards. When markets get choppy, investors tend to default to two unhelpful behaviours. They either freeze, postponing decisions and waiting for clarity, or they flee – fireselling whatever feels uncomfortable to hold, even if the long-term case hasn’t changed.
Both responses are understandable, but both are costly.
Freezing means you miss the best mis-pricings that make long-term returns possible and fleeing often means you convert temporary drawdowns into permanent losses, and then struggle to re-enter at sensible prices because you’ve trained yourself to associate investing with discomfort. The antidote isn’t just greater courage though, it’s having a clearer plan.
The Volatility Response Ladder: a simple process for turbulent days
When prices move sharply, you need a strategy to respond. Without one, the only option left to you is improvisation and that leaves you open to chance. With a plan, you can operate calmly, even when things are unpleasant – improvisation leave a question mark over the your decision-making.
Step 1: Pause (no trades for 15 minutes)
Take a breath and give yourself time to think. Your first impulse is based on adrenaline. Let your mind settle before you go near your portfolio. If you can’t wait 15 minutes, you’re not investing, you’re panicking.
Step 2: Diagnose the cause (company vs sector vs macro)
Ask yourself a question: What actually changed?
- Company-specific: earnings, guidance, regulatory announcement, litigation, management change.
- Sector-wide: commodity price moves, peer results, macro sensitivity re-priced.
- Macro-wide: rates expectations, inflation surprises, geopolitical shocks, liquidity events.
This diagnosis matters because it tells you what to look at next. Company-specific moves require business analysis. Macro moves require patience.
Step 3: Classify the movement (sentiment, cyclical, structural)
Now the crucial question: is this move signalling a change in long-term cash flows or a change in short-term sentiment?
A useful classification:
- Sentiment move: narrative shifts, risk-off days, positioning unwinds, headline shocks.
- Cyclical move: demand softness, inventory cycles, margin pressure in a normal downturn.
- Structural move: business model impairment, regulation, obsolescence, broken governance, permanent dilution.
Volatility isn’t automatically informative but it’s always demanding. Your job is to decide which category you’re dealing with.
Step 4: Decide the action type (hold, add, trim, or research-only)
Not every volatile move requires action. Sometimes the correct decision is “no decision until I understand this better.”
Give yourself four action modes:
- Hold: thesis intact, valuation not obviously compelling, no edge in acting today.
- Add: thesis intact and valuation now attractive relative to long-term earnings power.
- Trim: position sizing has become imprudent, or the thesis has weakened.
- Research-only: you cannot yet explain the move, so you do the work before acting.
Step 5: Execute only if preconditions are met
The preconditions should be written down. For example:
- Thesis intact (nothing has broken the long-term case).
- Valuation now offers a margin of safety.
- Position size remains within pre-defined limits.
- You aren’t buying merely because the price fell.
This is what turns “discipline” from a personality trait into a repeatable practice.
Defensive positions are for resilience, not for avoidance
Defensive holdings – cash, bonds, quality defensives, infrastructure-like cash flows – can reduce portfolio volatility, but that defence can also be a trap. Delegating judgement to “defensive” holdings that move less than the market can be just as ill-informed as piling into overhyped companies that have been ramped. When markets correct, bargains will react sharply but your portfolio will either stay put or be so full of cash you won’t know what to do because you’ve trained yourself to equate share price movement with danger.
In my opinion, the best use of defensive assets is to create optional ability to act.
If your portfolio is so fully invested that every drawdown creates stress and forces selling, you aren’t managing your portfolio, you’re simply enduring owning it. A modest allocation to resilience can be a strategic advantage but the goal shouldn’t just be comfort – it should be ensuring bandwidth to make decisions when you need to.
Compare how companies in the same sector respond to the same volatility
One of the most effective ways to learn from volatility is comparative thinking. When an entire sector sells off, don’t stop at “the sector is down.” Ask “Which names fell the most? Which fell the least?Why?” Two companies can sit in the same sector yet react very differently because of fundamental differences that only matter when stress arrives:
- Balance sheet strength: leverage magnifies downside and limits flexibility.
- Revenue quality: recurring vs cyclical demand changes how earnings are perceived.
- Pricing power: volatile periods reveal who can pass costs on.
- Customer concentration: fragility often hides in the client list.
- Regulatory exposure: some businesses are always one policy change away from repricing.
- Narrative fragility: “story stocks” fall harder because ownership is more fickle.
Volatility is often a sorting mechanism. It reveals where the market believes fragility exists. Sometimes the market is correct. Sometimes it is lazy. Remember, your advantage isn’t prediction. It’s discrimination.
Assume the market will over-discount something; your job is to find what it is
Markets overreact because humans do. In volatile periods, investors often price in worst-case outcomes not because they are certain, but because they are anxious. That creates gaps between price and long-term value. Your job is to determine whether the market is discounting:
- a temporary earnings dip as if it were permanent,
- a cyclical reset as if the business model is broken,
- a headline risk as if it were a balance sheet event.
This is also why you should be wary of simplistic “buy the dip” instincts. Some dips deserve buying but others deserve scrutiny. The difference is usually found in balance sheets, cash flow durability, and managerial behaviour. Don’t be afraid to take your time.
Maintain a high-quality watchlist and define your action rules in advance
In calm markets, everyone has conviction but volatile markets test that conviction. Having a high-quality watchlist isn’t simply a list of “nice companies.” It’s a list of businesses you understand well enough that, when prices gap down, you can make a rational decision quickly.
The single biggest upgrade most private investors can make is to write “watchlist cards” for their top prospective holdings. Not long essays – just enough structure to guide action when volatility arrives. Write down what must be true for you to own the company and for it to be a good investment, what the three biggest risks to that are, check for balance sheet red flags (debt!), set out some pricing levels you’d consider reasonable and the assumptions behind them, as well as position sizing intention.
Finally, give yourself a red line. I will NOT invest in this company if…
This isn’t bureaucracy, it’s research. You’re making decisions in advance, when you are calm, so that you aren’t improvising when prices are falling.
Permanent capital loss is the risk that matters
It is worth repeating: risk isn’t price movement, it’s permanent loss of capital. In my experience, most permanent losses come from a small number of recurring causes:
- Excess leverage: refinancing risk turns ordinary downturns into existential ones.
- Governance failure: incentives misaligned, capital misallocated, trust destroyed.
- Dilution: raising equity at depressed prices permanently damages per-share value.
- Margin structure collapse: what looked like a moat was actually a temporary advantage.
- Obsolescence: technology or regulation makes yesterday’s economics irrelevant.
- Hidden concentration: a few customers, contracts, or geographies create fragility.
By the time prices have fallen, the paper loss is already present. The question is what you do next. If the long-term case remains intact and the business is genuinely durable, the most damaging action is often to lock in a short-term loss in a long-term holding purely to relieve discomfort. That doesn’t reduce risk. It crystallises it.
Common volatility mistakes to avoid
A short list. Many readers will recognise yourselves here:
- Confusing volatility with risk, and mistaking calm charts for safe businesses.
- Averaging down in leveraged or structurally weak companies.
- Buying “cheap” without a thesis, then selling lower when the narrative worsens.
- Overtrading to regain a sense of control.
- Letting position size become accidental, rather than deliberate.
The objective is not to be fearless. The objective is to be procedural.
Closing thought: Volatility is the price of admission
Markets don’t pay you for being right in theory. They pay you for being disciplined in practice. Volatility, not matter how sharp, is no reason to abandon a sound long-term strategy – it’s simply environment in which a sound strategy proves its worth. If you build resilience, keep a prepared watchlist, and act carefully when value appears, volatility stops being something that happens to you and becomes something you can work with.
A final question to leave you with: when the next bout of volatility arrives -and it will – will you be reacting to the market, or executing a plan you already wrote when you were calm?