Why Overreacting to Market Volatility Is the Real Danger for Investors

The True Risk of Market Volatility Lies in Emotional Investor Decisions, Says Investment Expert

Paul Punzo, Chief Investment Officer and Vice President of Portfolio Strategy at Investment Planning Counsel, warns that reacting emotionally to market fluctuations can lead investors into avoidable risks that aren’t often fully explained.

Speaking on the Soundbites podcast, Punzo outlined four critical risks investors face when retreating hastily from volatile markets.

1. Timing Risk

“Exiting an asset class is easy — the challenge is knowing when to get back in,” he said. For instance, investors who pulled out of U.S. equities in April missed the sharp rebound in May. “Mistimed exits can lead to significant opportunity loss,” Punzo emphasized.

2. Sequencing Risk

Drawing down assets during a downturn accelerates portfolio depletion — a serious issue for retirees. Punzo recommends building downside protection into portfolios, even if it means missing some upside potential. “In decumulation, capital preservation matters more than short-term gains,” he noted.

3. Liquidity Risk

Some investment vehicles restrict withdrawals via lock-up periods or gating rules. “If life circumstances suddenly change and access to funds is needed, illiquid holdings become a problem,” Punzo said. Liquidity should be considered proactively.

4. Concentration Risk

Overexposure to a specific sector or geography — sometimes due to legacy holdings or emotional attachments — increases both volatility and downside exposure. “It’s crucial to examine portfolio composition and ensure proper diversification,” he advised.

Punzo also distinguishes between normal market volatility — driven by shifts in sentiment, data, or geopolitics — and structural dislocation, which he defines as prolonged breakdowns in pricing caused by policy missteps or external shocks.

To defend against such disruptions, he recommends diversification and alternative assets like real estate, infrastructure, and commodities. “Alternatives are key to reducing volatility, enhancing returns, and generating income,” Punzo said.

His final advice? Stay disciplined. “Keep your target asset allocation and risk profile in place. Tactical shifts are fine, but don’t let short-term noise drive long-term decisions.”