STOCK MARKET VOLATILITY IN 2025 – SIX BASIC LESSONS

This article is about the current volatile state of the stock market. It opens with a background analysis of what’s been happening and then offers six basic lessons to consider on how, as an investor, you should react to the volatility.

Background

Even the most disinterested of observers would have noticed the performance of world stock markets over the last few months has been volatile, to say the least. For example, the Australian All Ordinaries Index (aka AORD) has moved from a high of 8,825 points in February to a low of 7,524, then back to 8,125 points at the time of writing this article in late April (with a lot of volatility in between and maybe a lot more to come).

Financial experts have noted that the daily movements we’re experiencing are reminiscent of 2008 when the Global Financial Crisis (GFC) ushered in a period of significant volatility and business collapses not seen since the Great Depression of 1929. Much has been written about the causes and impacts of the GFC, including its significant contribution to where the world’s fragile economy and political systems are now.

When we add to this mix the proposed aggressive use of tariffs by the United States, apparently designed to redraw the world’s trading system in its favour, an environment of economic uncertainty has been created at a level unseen since the pandemic. Here’s an excellent article from the BBC on tariffs, including what they are and how the United States is seeking to use them.

The key to understanding the volatility is to recognise the impact of uncertainty on the behaviour and sentiment of market participants. The business community hates uncertainty. They aren’t alone there. As a result, many business owners are holding back from making important investment decisions and investors are moving money out of the stock market (some did so months ago) into what they perceive to be safer investment havens such as cash or gold. The result is volatility caused by uncertainty, a phenomenon often said to be the product of greed and fear.

At this stage the so-called “trade war” looks more like a noisy sabre-rattling exercise involving a lot of political rhetoric designed to extract concessions, rather than a full-on permanent economic confrontation. Time will tell what happens, but in the meantime, share markets are likely to remain volatile. Hopefully, the world won’t accidentally slide into an economic recession, although some commentators are predicting that it will.

On the subject of predictions, here’s a word of warning. No one can correctly predict the future 100% of the time. That includes the media’s financial “experts” who are handsomely paid to sound authoritative and unerringly correct in their predictions. By all means, listen to them, but don’t automatically assume they will be right because most of the time they won’t be.

At this point, the average investor (including members of superannuation funds) should be asking themselves the “so what?” questions. So what does all of this mean for me? I can’t control what’s going on, so what can I do to protect myself from the impact of these worldwide events?

Six Basic Lessons

There are six basic lessons to be learned from the current volatility and from many other similar situations we’ve seen in living memory (and beyond):

1) It will end. If history is any guide (and history is pretty much all we’ve got) we can reasonably conclude that the volatility will end. It’s just that no one knows when or how or under what circumstances. Therefore, how, when or whether you act should be based on measured and careful thought. Your decisions should never be knee-jerk, emotional and ill-informed reactions to bad news.

2) Recognise that volatility and uncertainty are a permanent characteristic of share markets. Sometimes, this turns into panic and markets crash. At that time, some people with a limited willingness or ability to accept risk will sell at or near the bottom of the market, thereby unnecessarily turning paper losses into real ones. Many people regretted doing just that during the GFC, although some had no option, due to personal debt levels.

3) Get into the habit of thinking about your investments as longer term commitments to your wealth creation strategy, not short term speculative gambles that are bought and sold in the vain hope of making regular profits. If the latter is your approach, only gamble with what you can afford to lose because history shows that you will almost certainly lose more often than you win.

4) Excessive debt is the cause of most financial disasters throughout history. It limits your agility and flexibility in hard economic times and can cause financially embarrassing cashflow problems when you are least able to weather a financial storm. The lesson here is to understand the importance of limiting and carefully managing your debt, so that should the worst happen, you’ll be in a good position to minimise the damage and to take advantage of opportunities.
Some “courageous” people borrow money to invest in stock markets. That process is called “margin lending”. In times like this when markets have fallen heavily, these investors can experience what’s referred to as a “margin call” from their lenders. It’s an unpleasant event in which investors are required to repay some or all of their loan/s when they can least afford to do so. If you’d like to learn more about this wealth destroying activity in an entertaining way, watch the unforgettable 2011 thriller/drama feature film Margin Call.

5) Whatever your financial position, always try to have a cash buffer, preferably three to six months’ worth of living expenses placed in a secure, accessible savings account. It’s important to know that in Australia, the federal government guarantees deposits in authorised deposit-taking institutions (ADIs), such as banks and credit unions, up to $250,000 per account holder per ADI. This strategy should give you peace of mind, minimise anxiety and help you to get through the worst of any economic downturns and their consequences, such as reduced family income or loss of employment.

6) Consider seeking professional advice before entering the share market or before making major changes in your investments.

There are over 15,000 licensed financial advisers in Australia. Before appointing one, read the section in our Centre’s website on getting financial advice. You’ll also find the ADF Financial Advice Referral Program which offers a list of licensed financial advisers who have undertaken in writing to Defence that they operate only on a fee for service basis (flat fees or hourly rates, no third party commissions and no percentage-based asset fees paid by clients). Whoever you consult, understand that financial advice can be expensive. Therefore, before proceeding make sure that you understand the scope of the proposed advice and its cost and get that information in writing.

Our final point – by this time next year the current stock market volatility may be a distant memory, although we can’t be certain. It may even be worse. No one knows. No one. But at least by treating these simple lessons seriously, you will be taking some reasonable and sensible steps to protect yourself from the worst of the economic downturns that have always been an inevitable feature of the world in which we live.