Periods of heightened market volatility are exposing a series of common behavioural mistakes that can severely damage long-term investment returns, according to PSG Asset Management.Chief investment officer John Gilchrist said investors often make poor decisions during periods of uncertainty by reacting emotionally to falling markets, chasing recent outperformers or relying too heavily on macroeconomic forecasts rather than valuations.His comments come as investors navigate geopolitical conflict, shifting trade dynamics, uncertainty around global growth and questions over the path of inflation and interest rates. These factors have driven sharp swings in financial markets, increasing pressure on investors to react to fast-changing headlines and sentiment.According to PSG Asset Management, one of the most damaging responses to volatility is panic selling, particularly when markets fall and uncertainty rises.Gilchrist said emotional decision-making often intensifies during downturns, even though much of the available information is already reflected in prices. “As humans, our emotions are inherently tied to our investing behaviour, so it is natural to want to act when markets fall and an investment is under pressure.”John Gilchrist, chief investment officer at PSG Asset Management. (Suppl) The firm pointed to market reactions following the escalation in the Middle East in March, which triggered signs of panic selling across global markets as investors moved into cash and defensive assets. However, the asset manager said markets frequently overreact in the short term, creating opportunities for recovery once sentiment stabilises.Gilchrist warned that investors who exit during periods of stress often struggle to re-enter once markets recover, as improving sentiment is typically accompanied by rising prices. “The problem is that when investors disinvest and move into cash, they often miss the subsequent rebound,” he said.Beyond panic selling, the firm said investors often focus too heavily on predicting macroeconomic or political outcomes rather than assessing what is already reflected in asset prices. This behaviour becomes more pronounced during periods of heavy news flow, when geopolitical developments and policy shifts can rapidly alter sentiment.The key question is not what will happen, but what is already priced in.— John GilchristGilchrist said the key question is not what will happen, but what is already priced in.“When major news events dominate headlines and market noise is elevated, it is often less helpful to ask, ‘What is going to happen?’ than to ask, ‘What is already priced in?’”PSG cited the contrasting performance of South African and Indian equities in 2025 to illustrate the point.Despite India’s GDP growth of 7.8% vs South Africa’s 1.1%, Indian equities fell 3% in dollar terms, while South African equities rose nearly 61%.According to the asset manager, the divergence showed that economic growth does not necessarily translate into stronger market returns, with valuations and expectations playing a greater role.“In other words, the Indian market was priced for near-perfection, and the South African market was priced for disappointment,” Gilchrist said.The firm also cautioned against performance chasing, where investors buy assets simply because prices have already risen. It said momentum-driven rallies can attract further buying, reinforcing gains, but can reverse quickly when sentiment shifts or liquidity fades.Recent strength in gold prices reflected similar dynamics, supported by geopolitical tensions, central bank demand and safe-haven flows.“A small price decline can cause momentum-driven buying to dry up. If there are no incremental buyers left, prices can fall sharply,” Gilchrist said.The asset manager also warned against relying too heavily on historical market relationships when building portfolios.It pointed to 2021–2022, when US bonds failed to act as a hedge against equities despite expectations, as both asset classes sold off amid historically expensive bond valuations. The episode showed that valuations can influence not only returns but also how assets behave under stress.“Investors should prioritise valuation-aware diversification and scenario analysis rather than relying solely on historical correlations,” said Gilchrist. “Rather than relying purely on history, we prefer to ensure assets we hold are attractive from a valuation perspective, and to use tailored scenario analysis and stress testing to build portfolios that are resilient across a range of outcomes,” he said.Business Times