Being Prepared for Market Corrections and How to Make Good Decisions

As we have stated in recent articles, we are questioning whether some parts of financial markets are looking overpriced and starting to exhibit the characteristics of a market bubble. This article discusses more about how you can think about this, analyse the news, and then make appropriate decisions for you. At times like this it is important to get professional and independent advice, reach out to us at Black Swan Capital to understand the best course of action for you.

Before we get into the details, a qualifier: we at Black Swan Capital- and this applies to every amateur and professional, economist, analyst, adviser, politician and investor- does not know with certainty what the market will do next. It might continue on its current trajectory, speed up, slow down, or correct. We therefore go back to our principles which are to be focused on your goals, your needs for the money you have invested, your capacity for loss, and in applying the Black Swan theory, making sure you have contingencies in place should something unexpected happen. Good advice plans for all outcomes and adapts for your specific situation.

We will discuss some biases and decision points that you can discuss with us and apply to your specific circumstances. These can help you to make informed decisions.

Loss aversion is a cognitive bias that demonstrates how the pain of losing is psychologically twice as powerful as the pleasure of gaining for most people. Investors that act solely on loss aversion biases will take actions with the intention of avoiding losses rather than, and sometimes at the cost of, generating gains.

That doesn’t mean that sometimes avoiding a loss is not a good idea; it may well be appropriate at some times, and in some of our recent articles we are even advocating this for some people. There is an important difference though between making a tactical decision to lock in gains and reduce exposure to a potential loss, than to reacting after a market event has happened.

Ignore the “fight or flight” response to market volatility

When investing, a sudden shock can often prompt a fight, flight, or freeze response from investors. We saw this in early 2025 when stock markets briefly but sharply fell on the announcement of US tariffs. Those investors that reacted to this by selling out after the market fall, would have missed the recovery of the following months.

While these natural responses are common with humans in a variety of settings, fight or flight responses are often poorly suited to investing.

Our advice is to make every investment decision with your focus on your end goals, and to ask the question of how any action will help you to achieve your objectives.

“This time it’s different” – avoid the momentum investor bias

We have heard this many times across market cycles and it is always a valuable warning sign when someone utters the phrase “this time it’s different.” We are hearing this increasingly about AI.

When you hear this phrase, it is often a useful indicator that something is about to change about your investments and the markets. Whilst we don’t know what the markets may do from one day to the next, there is one certainty. That is, that if markets are going up, they will eventually turn and go down, and if they are going down, they will inevitably recover and go up. And, over time they increase in value, i.e. they go up more than they go down.

When markets are rising strongly, we often hear announcements of “this time it’s different” and that it will rise forever. Our advice is that this is a time for caution, be wary of the trend. We saw it in the tech bubble of 1999, and the cryptocurrency spike in 2017. Each time this comment is made, for us it is a sign that the market, or that investment, is at or near its peak in the current cycle. Markets never rise forever.

Similarly, they don’t fall forever. At their depths, we hear market commentators despairing that this time it was different. In a falling market, this is an assurance. Because when you hear this, it is often a sign that the worst may be close to the end for now.

The big investor bias trap here is to follow the belief that “this time it’s different.” At either end of the cycle, it is typically wise to not go with what the herd is doing. When you hear this, do one of two things: keep doing what you have done for the long term, i.e. make no changes, or do the opposite of what the herd does.

Volatility and risk

It is an important time to restate the difference between volatility and risk. Volatility is how much prices move- up or down- from one day to the next. A degree of volatility is ‘normal’ or acceptable. When volatility is higher, the question to ask yourself is whether your investment remains aligned to your long term goals.

Risk is different. Risk is the chance of absolute loss.  This is different from volatility. Volatility means your investment may be worth more or less than yesterday, but that the fundamentals that underpin the investment remain unchanged. Risk means your investment could reduce to zero and not be worth anything in the future. It is important to understand the difference between the two.
We avoid risk and we apply volatility appropriate to your needs. Why? Because you need some volatility exposure to get returns.

When markets are volatile it is normal to feel anxious, which is why knowing the difference between volatility and risk is so important. The best course of action for you might be different from the next person. For some people it may be best to act now, take the gains and move to a more conservative position. For others, it will be better to stay invested through a volatile cycle.

Our overriding advice is to remain goal focused. If your timeframe is 10 years, for example, it might not matter what happens within one month. This comes with the caveat that core investment fundamentals remain sound and acknowledges tactical adjustments across market cycles.

More importantly, it reinforces that one should not react against moves that have already happened, and one should also not try and time the market. As has been stated many times, there have been many investors that have lost a lot more money trying to time a market, than those that have sat through a market downturn (and recovery). 

Notwithstanding all the above, and with all the knowledge in the world, it is not unusual to feel anxious about markets that are more volatile than normal. We believe the best thing you can do is speak with a professional, like the team at Black Swan Capital.