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How to handle volatility at the start of the year: a guide for the calm investor
Key takeaways
- Volatility is a natural part of equity investing — without it there would be no risk premium.
- Regular investing (DCA) removes the stress of timing and averages purchase prices throughout fluctuations.
- Selling in panic during a downturn is the most common way investors damage their long-term results.
- Checking a portfolio every day increases emotional involvement without adding informational value for a long-term investor.
- The key question during volatility: have the fundamentals of my investment thesis changed? If not, action is usually not needed.
Why the beginning of the year is chaotic on markets
The first months of a new year are historically one of the most volatile periods on equity markets. Investors reassess portfolios after the new-year review, the first company results for the previous year arrive, central banks signal their plans and the media are full of predictions. All these impulses collide at once and markets react with moves in both directions. The result is a psychological test — especially for less experienced investors.
Volatility is not a problem, it is a condition for returns
This is probably the most important thing a long-term investor must internalise: volatility is not the enemy, it is the price we pay for the higher returns of equities relative to bonds or cash. Without swings, equities would not offer a risk premium and everyone would buy them — thereby eliminating the premium.
Volatility hurts psychologically, not mathematically. A portfolio that falls 20% and then rises 25% is worth more than before. The problem arises if you sell during the decline — then you realise the loss.
Three strategies for a calm period of volatility
- Regular investing (DCA): you invest a fixed amount at regular intervals regardless of prices. You buy more units during a dip and fewer during a rally — you average out the cost basis and remove the stress of timing.
- Don't check your portfolio every day: daily price monitoring increases emotional engagement without adding informational value. A long-term investor does not need to know where the market is today — they need to know where it was after 10 years.
- Investment journal: before investing, write down why you made the decision and what you would need to see to reconsider. During volatility, return to the entry — you will often find that none of the reasons have changed.
What to watch and what to ignore
Worth monitoring: whether the fundamentals of your investment thesis have changed, whether your allocation still matches your horizon and risk tolerance, whether you need cash in the near term. To ignore: daily index swings, media headlines about "the crash of the year", analyst predictions of specific short-term market moves.
If the psychology of investing interests you, read what risk is and how to measure it. To understand why a passive approach usually wins in turbulent times, read active vs. passive investing.
FAQ
How do I know if a market decline is a sell signal rather than just volatility?
Ask yourself: have the fundamentals changed that led you to hold the investment? If you bought a global index and the global economy is still functioning, a short-term decline is not a sell signal — it is volatility.
Does it make sense to buy equities during a dip?
For a regular investor with a DCA strategy, yes — during a dip you buy more units for the same amount. But trying to time the exact bottom is statistically unsuccessful even among professionals.
What is the VIX and why do investors watch it?
VIX is the US market volatility index, derived from S&P 500 option prices. It is called the "fear index" — a high VIX signals market nervousness. For a long-term investor it is more context than an action signal.