New Shocks, Old Lessons: How To Steer Through Market Volatility

Stock markets are known for their resilience, but they can still get rattled by a shift in sentiment. Take the recent months, for instance: Indian equities have seen sharp ups and downs, first shaken by domestic worries over sky-high valuations, and then jolted again when US President Donald Trump ramped up tariff threats—triggering anxiety among investors worldwide. To put things in perspective, since hitting its peak in September 2024, the Nifty 50 erased over $1 trillion of investor wealth in April, though there was a recovery after the tariff pause. Anyhow, market volatility continues.

While many investors panicked and rushed to exit earlier in the month, some savvy investors paused, using this uncertainty as an opportunity to reflect and recalibrate. In volatile markets, how you respond often matters more than the turbulence itself. Here are five common mistakes investors tend to make in uncertain times and how you can steer clear of them.

Mistake 1: Not Rebalancing The Portfolio

Different asset classes such as stocks, bonds, gold/silver, infrastructure investment trusts, and real estate investment trusts, grow at different rates. If stocks rise faster, they take up a bigger share of your portfolio. If they fall, the balance tilts the other way.

Rebalancing helps adjusting your investments to bring them back to their target mix. It ensures you don’t take too much risk when stocks are high or miss opportunities when they are low. A well-maintained asset allocation helps you stay in control during market swings. Regular rebalancing ensures that your investments work for you, not against you.

How To Rebalance Smartly?

• Set a Rebalancing Rule

Decide how far your asset mix can drift before you adjust. A 5 per cent deviation from your target is a good starting point.

• Rebalance on a Schedule

Some investors rebalance every six months, some do it annually. The goal is consistency—not constant changes.

• Be Mindful of Costs

Rebalancing may involve selling and buying assets. Always consider taxes and transaction fees while making any change.

Mistake 2: Do Not Stop Allocation to Equities

When markets turn rough, many investors panic and stop investing or even pull out of stocks. This is, typically, due to fear of more losses, recency bias and the attitude to wait for the right time to invest, which is a mistake. Equities build wealth over time. Stopping investments during market dips hurt returns. Stay committed, use systematic investment plans and ignore short-term noise.

However, staying invested doesn’t mean blindly buying more of a stock just because its price has dropped.

Why Should You Stay Invested?

• Equities Beat Inflation

Over time, stocks can outperform most asset classes. They also help investors grow wealth faster than inflation.

• Nifty 50 Moves Up Over Time

Despite crashes, the long-term trend is upward. The index has delivered an average 12-14 per cent annual return over the past two decades.

• Recoveries Follow Crashes

Markets bounce back. Those who stay invested benefit the most.

Mistake 3: Don’t Average Stocks Just Because They Have Fallen

Many investors believe that buying more of a falling stock is a smart move. This isn’t always the case. A stock that looks “cheap” may keep falling for a reason, including fundamental issues like shrinking profit, too much debt, cash flow problems etc. A 30 per cent drop can become 50 per cent or more if the business outlook worsens.

Never buy more of a stock just because it has dropped. Do your own research first. If the fundamentals are weak, it’s not a bargain but a trap.

Key Questions to Ask Before Buying More

• Why Did the Stock Fall?

Check if the drop is due to market panic or real company problems.

• Are The Fundamentals Still Strong?

Look at profits, debt, and industry trends.

• What’s the Growth Outlook?

If future earnings are falling, the stock isn’t undervalued. It’s just losing value.

• What Are Analysts Saying?

Check expert views from time to time. Sometimes, analysts can sense bad news even before investors do.

• Are Valuation Metrics In Place?

Compare price-to-earnings (P-E), return on equity (ROE), and debt-to-equity ratios (D/E) before averaging down.

Mistake 4: Do Not Invest 100 per cent in Equities, Keep Cash

Many investors go all-in on stocks, thinking it’s the fastest way to build wealth. This can backfire. Markets don’t move in a straight line. Keep some cash as markets are unpredictable, cheap stocks can get cheaper and having some cash will calm you down. A small reserve gives you flexibility, confidence, and better long-term returns.

How to Manage Cash Wisely

• Use Liquid Funds

Keep cash in low-risk funds that earn some returns.

• Replenish Cash Over Time

When stocks rise, trim some profits to rebuild reserves.

• Deploy Cash in Bear Markets

Use it when valuations are low.

Mistake 5: Avoid Recency Bias—Look Beyond the Recent Past

Investors often focus too much on recent events. If stocks have fallen, they assume they’ll keep falling and vice-versa. This is recency bias—and it leads to bad decisions.

You can overcome this bias by checking future earnings potential, along with past prices. Use forward-looking metrics such as P-E and price/earnings-to-growth ratio, (PEG Ratio) which adjusts P-E ratio for expected growth.

Why Is Recency Bias Dangerous?

• A Cheap Stock Can Be Expensive

A stock that drops 30 per cent may still be overpriced if its earnings outlook has worsened.

• Markets Change Direction Suddenly

Just because stocks fell last month, doesn’t mean they will keep falling.

• Investors Ignore New Risks

Relying on past performance blinds you to shifts in fundamentals, industry trends, or global events.

Article is contributed by ICICI Securities Research Team | This is not an Outlook Money feature

Disclaimer

ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing.