Generally speaking, the short answer is possible but extremely hard to do from retail investors' perspective.

While all the books, pundits, and so-called experts regarding investment or portfolio management discuss the importance of being disciplined, fundamental-focused, and maintaining a long-term perspective, human nature makes it difficult and unlikely to execute these strategies effectively. Let's be real, paper trading is very different from investing your hard-earned dollars.

This week, the global financial markets have been experiencing dramatic volatility and investor panic is spreading rapidly as the Trump administration announced a new round of tariff hikes. This volatility not only occurred in the stock market, but also affected other investment markets, such as bond and commodity markets. In the process, investors' mood swings were not only influenced by market fundamentals, but also heavily exacerbated by the spread of online information, especially false news and misleading information. These factors, facilitated by modern social platforms and news media, are often over-amplified, leading investors to make irrational decisions.

In this article, we will combine the theories of investment psychology and behavioral finance to explore the psychological reactions of investors during investment market volatility, analyze how false information amplifies this panic, and how investors can cope with market volatility through rational decision-making.

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1. Psychological Mechanisms of Investment Market Volatility  

Whether it is the stock market, the bond market or the commodity market, the psychological reaction of investors is usually more dramatic than the volatility of the market itself. Behavioral finance research has shown that investors' emotions often have a significant impact on market volatility. In different types of investment markets, investors' psychological reactions are affected by a variety of cognitive biases, the most notable of which include loss aversion, herd effect and overconfidence.

1.1 Loss aversion  

Loss aversion is one of the core theories of behavioral economics, stating that people perceive the pain of a loss much more than the joy of a gain of the same amount. Investors react more violently emotionally when faced with market volatility, especially when they are down or losing money. This psychology not only affects stock market investments but is also widespread in other markets.

In March 2020, global stock markets experienced a sharp decline due to the impact of COVID. During the early stages of the market drop, many investors, driven by loss aversion, chose to sell off their stocks, even though the underlying market fundamentals had not greatly changed. Many investors missed out on the subsequent market recovery, particularly in tech stocks (such as Apple and Tesla), and those who had originally planned to cut their losses ended up suffering more.

1.2 The Herd Effect  

The herd effect refers to the tendency of individuals to follow the behavioral decisions of the majority rather than think independently in situations of uncertainty. In the bond market or commodity market, if the majority of investors choose to sell their assets, other investors will also be affected, leading to a further decline in the market. The herd effect often causes investors to blindly follow market sentiment and ignore changes in market fundamentals.

In early 2021, GameStop stock's surge made headlines in the investment world, with a classic herd effect occurring behind the scenes. Initially, the stock's rise was driven by a small group of retail investors who collectively found out about the massive shortening of the company's stock on Reddit's Wall Street Bets forum and decided to buy shares en masse, pushing up the stock price.

As the stock price skyrocketed, more retail and institutional investors followed suit, and after seeing the success stories of others who invested in the stock, they jumped on the buying bandwagon, driving the stock price up by 1,600% in just a few days. However, this collective behavior of the herd effect was not based on the company's fundamentals or expectations of future growth, and ultimately, the surge in the stock price triggered huge market volatility, with many of the followers suffering huge losses when the stock price retraced its steps.

This incident demonstrates the powerful influence of the herd effect in the stock market that investors blindly follow the herd because they see others making money, ignoring the fact that the stock price may have moved away from its actual value. Eventually, the stock price retreated and led to losses for those investors who lacked rational analysis.

1.3 Overconfidence  

Overconfidence is another psychological bias that affects investors' decision-making, referring to investors' overestimation of their ability to judge the market. During a rally in the commodity or stock market, overconfident investors tend to believe that the market will continue to rise, thus ignoring potential risks and adopting overly aggressive investment strategies.

In the dramatic volatility of the oil market in 2020, oil prices fell sharply in the early stages of the epidemic, however, in the summer of 2020, oil prices began to rebound. Some investors blindly entered the market with highly leveraged investments due to overconfidence that oil prices had bottomed out. As the market retraced its steps again, these investors suffered huge losses due to their overconfidence and decision-making without regard to potential risks, especially in the high-risk energy stock and futures markets.

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2. Amplification of False News and Misinformation  

In the age of information explosion, false news and misleading information spread rapidly through social platforms, often exacerbating investor panic. Stock, bond, and commodity market fluctuations are often accompanied by a plethora of news reports that may disproportionately affect investors' decisions.

2.1 Fake News and Investment Market Panic  

Fake news tends to exaggerate or distort facts to attract attention. During investment downturns, fake news can trigger an emotional response from investors, thereby accelerating market instability.

For example, some media outlets recently published an unconfirmed news story claiming that the Trump administration may suspend its policy of continuing tariffs on all countries except China, causing the market to overreact. The news, which initially came from a user on a major social media platform, was quoted and disseminated by other news organizations without adequate vetting of the message. Panic buying and selling in the market ensued. Although a corrective statement was quickly issued stating that the information was inaccurate, the speed at which the false news spread caused investors to panic, leading to significant volatility in the short term.

2.2 Misleading Information and Market Reaction  

Unlike false news, misleading information, by definition, is usually not a deliberate attempt to create false content, but rather it is a result of a misunderstanding of the source of the information, an incomplete analysis, or an overly optimistic or pessimistic market forecast that leads investors to draw the wrong conclusions (nowadays, the line between fake news and misleading info is blurry). Even though misleading information might not intentionally misrepresent the facts, its erroneous market analysis or forecasts can still affect investors' emotions and cause them to overreact.

In April 2025, a well-known financial institution issued an overly pessimistic market forecast stating that Trump's tariff policies would lead to a slowdown in the global economy and that China's economic growth would decrease significantly. While this forecast was not intentionally misleading, its market outlook led many investors to withdraw their investments in China and related markets, exacerbating the downward pressure on global markets. This forecast triggered panic among investors, which in turn led to irrational market reactions.

2.3 Information Overload and Investment Decisions  

Information spreads faster than ever in modern society. The immediacy and breadth of social media allow false or misleading information to quickly influence the decisions of a large number of investors. Especially during market volatility, information overload may make it difficult for investors to make rational decisions.

In the spring of 2025, global market information overload due to the uncertainty of Trump's tariff policy made it hard for investors to make calm judgments when they were presented with a large amount of complex information. As a result, many investors made decisions to blindly follow the crowd due to the impact of emotions and information overload, leading to sharp fluctuations in global markets.

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3.Coping with Investment Market Panic

Although panic and volatility in the investment market are unavoidable, often intertwined with human nature, investors could still find ways to cope with these emotional fluctuations and alleviate (unless to minimize) the impact of psychological factors on decision-making.  

3.1 Long-Term Perspective  

Whether it is the stock market, or any other investment sector, a long-term investment perspective is the best strategy for dealing with market volatility. When we say long term, we are talking about holding periods in years, but not days, weeks or months.  Since short-term fluctuations are often driven by emotions and will not reflect the long-term value of an asset, investors should focus on fundamental analysis and make investment decisions by understanding the true value of a business or asset, rather than being swayed by short-term fluctuations.  

Easier said than done? Yes, one suggestion is to build different buckets in your portfolio, allocating a small percentage to short-term trading for the adrenaline rush of being part of the game, while keeping the majority of your portfolio focused on long-term investments.

3.2 Diversification with “Choice” and Risk Management  

Diversification is an effective way to manage portfolio risk. By allocating funds to different asset classes, sectors and regions, investors can reduce the influence of a single market fluctuation on the entire portfolio.  

We are believers in "Diversification with Choice" not just diversification, which means that while diversifying across various asset classes is important, the choice of individual assets is critical and underscores the value of fundamental analysis. Although diversification ideally lowers the correlation of different assets within the portfolio, it could also lead to lower returns if not executed properly.

Risk management strategies, such as setting risk limits and implementing stop-loss strategies, can help investors minimize losses and maintain rational decision-making during market volatility; however, these practices are more commonly adopted and strictly followed by hedge funds and mutual funds, along with some highly sophisticated individual investors, as they demand a high degree of discipline. For funds, internal guidelines clearly define and dictate risk tolerance and processes, but for individuals, self-discipline is much more relevant.

3.3 Emotional Regulation and Rational Decision Making  

Fluctuations in the stock market, or other investment markets are likely to trigger emotional reactions in investors, especially during times of severe volatility. Investors should control their mental state through emotional regulation, such as through meditation, recording the investment decision-making process and review on regular basis, or communicating with professional advisors to remain calm. Rational thinking and emotional management can help investors make more rational investment decisions.

If the above is not applicable, take a deep breath and carry on.

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4.Conclusion  

No one likes uncertainty, and our view is simple: volatility is here to stay.  

In this environment, the spread of fake news and misleading information exacerbates panic market reactions and leads investors to make irrational decisions, whether intentionally or not.  

Everyone copes with stress and emotions differently, so aside from the textbook answers shared, although some of which actually work, identifying your own unique way to manage these challenges is critical.