Understanding Volatility in an Age of Instant Reaction

Markets at the moment aren’t just reacting to the Iran war headlines – they’re reacting to what investors think those headlines might mean next. When news breaks about the current conflict, the Strait is shut, the Strait is open, investors are not sitting around waiting for all the facts. They are reacting in real time, making assumptions about fuel costs, company profits, inflation and what central banks might do with interest rates. As a result, prices are moving quickly.

When uncertainty is high, decisions tend to speed up. People focus on whatever is most intense and recent – dramatic images, big headlines, sharp moves. Psychologists call this the availability heuristic: if something is right in front of us, we give it more weight than it really deserves. In markets, that can mean a single news story shapes behaviour far more than longer-term fundamentals.

Markets are also social. Investors watch each other as much as they watch the news. When prices fall, many sell simply to avoid being the last one out; when markets rebound, they dive back in to avoid missing out. That herd behaviour can exaggerate moves in both directions. We’re seeing that right now: in just three weeks the ASX has regained almost all of its roughly 10% fall after the Iran conflict began, while over the same period the S&P 500 is actually about 3% above where it was before the conflict.

Funny how we don’t experience gains and losses equally. Losses hurt more than gains of the same size feel good, so a sharp fall on the ASX tends to feel worse than an equivalent rally feels rewarding. After a decline, people naturally worry about further downside; after a rebound, the conversation often flips to frustration about missing out. Neither response is strange, it’s just how we’re wired. This can also easily lead to buying when things feel “safe” and selling when they feel “worrying”.

Over time, the pattern tends to be that markets move around when there are lots of unknowns and then calm down as more information arrives. It’s not that emotion disappears; there is just less guesswork and fewer extreme assumptions being made.

From an investor’s perspective, this is where behaviour matters most. Trying to trade every turn in the Iran war is extraordinarily difficult to do well, unless, of course, you’ve got tomorrow’s newspaper. A more practical approach for long-term investors is to stay invested in quality assets, keep to a clear strategy and avoid making big decisions based purely on a week or two of market noise.

Volatility is part of investing, especially in periods like this. The real risk is not that markets move around, but that those moves tempt us to abandon a long-term plan that was designed to get us through exactly these sorts of periods.

If you’re reassessing your position in the current environment, we’re here to help you navigate the uncertainty with a clear, structured approach. Start the Conversation.