How to remain calm amid market chaos

When large institutional investors start selling, it creates a tidal wave that drags down even the most resilient stocks within a sector. This snowballs into a heard behaviour leading to across-the-board stocks despite their relatively lower or no exposure to the tariff announcement

If one were to observe the last week’s markets, one would observe a classic case of financial whiplash.The week began with a sharp jolt to the IT services sector as proposed changes to H-1B visa regulations sent them tumbling.

The initial panic was palpable, a stark reminder of the sector’s reliance on global talent. Then, as the week ended, the focus shifted to the pharmaceuticals, where news of potential tariffs battered stocks across the board, though the restrictions targeted only a particular set of companies.

This is not a new pattern but the rhythm of the modern markets. It’s a powerful lesson in how financial markets react to the constant drumbeat of policy changes and geopolitical events. The knee-jerk reaction is a feature. The immediate, sharp sell-off in response to such news is not a bug.

This pattern is not new; it's the rhythm of the modern market. It’s a powerful lesson in how financial markets react to the constant drumbeat of policy changes and geopolitical events. Markets are usually priced on expectations than the actuals.

So, as the narrative changes, markets try to price in that information, also extrapolated. This is why we see extreme reactions, both on the up- or down-side. And when such policy changes happen, it creates huge uncertainty about prospects, the easiest reaction is to take flight. Cut losses by selling the positions and ponder later.

Add to this is the domino effect. The H-1B news not only affected a few companies but it shook the foundational business model for the entire IT services industry. Also, cast a cloud on the outsourcing industry that’s another subset.

Similarly, the tariff announcement on pharma sparked fears of a broader trade war, potentially impacting everything from drug ingredient imports to export profitability. The market in these scenarios usually prices the worst-case before discerning the actual impact.

When large institutional investors start selling, it creates a tidal wave that drags down even the most resilient stocks within a sector. This snowballs into a heard behaviour leading to across-the-board stocks despite their relatively lower or no exposure to the tariff announcement.

At such instances, the market takes an elevator to go down while takes stairs to climb up. Regaining composure is a slow and steady stabilisation process. After the emotional sell-off, a more analytical phase begins.

Market participants dissect the fine print and identify which companies are affected, which have diverse revenue streams and strong balance sheets to weather such a storm. This period of digestion allows cooler heads to prevail and value often reemerges, making stocks to gradually move from the troughs as more rational equilibrium settles.

This cycle of reaction and stabilisation is a permanent feature of investing. The real test lies in not the market but you. Policy changes, geopolitical skirmishes and economic data shocks will happen with regularity. They’re inevitable sources of volatility that will cause your portfolio to fluctuate, at times sharply.

It’s said that one’s investment returns are not driven by market actions but how one reacts to the market action. The critical question,hence, is not how to avoid volatilitybut how to manage the reaction to it. It was This is where the most important investment concept one can cultivate comes into play - knowing ones "Sleeping Point."

It is the level of portfolio volatility one can endure without losing a night's sleep. It’s the cushion of comfort that allows one to watch a segment of the portfolio tumble and still not feel compelled to make a rash reactionary decision. It’s the emotional anchor that prevents one from converting a paper/notional loss into a real one.

Finding and fortifying ones sleeping point requires a very honest self-reflection.

Understand the timelines: If one is investing for a goal ten or twenty years away, a week of volatility is insignificant distraction. The focus should be on the long-term growth trajectory of the investments and not on the daily headlines.

Assess the true Risk Tolerance: Be realistic. If a 10 per cent market drop makes you anxious, the portfolio should be built accordingly. A well-structured, diversified portfolio that aligns with your genuine risk tolerance is the best defense against panic selling.

Embrace Diversification: The old adage "don't put all your eggs in one basket" can be your greatest ally. A diversified portfolio across sectors and asset classes ensures that a blow to one area (like IT or Pharma) is cushioned by stability or growth in others.

The goal of successful investing is not to predict every storm but to build a ship sturdy enough to sail through them. beyond the short-term noise. One can acknowledge the volatility without being controlled by it, making disciplined decisions based on long-term strategy rather than short-term fear. In the end, the most valuable asset you can cultivate is not a particular stock, but the calm to hold on.

(The author is a partner at “Wealocity Analytics”, a SEBI registered Research Analyst firm and can be reached at [email protected])