Investment Principles in a Volatile Market

Formation of Volatile Market Conditions

Summarizing historical trends, we can identify several main reasons why the stock market enters a

period of volatility:

1. Concentration of Market News: When significant factors affecting the market emerge in a short period, the variables influencing market movements increase sharply. Particularly, the simultaneous appearance of bullish and bearish news in a short timeframe creates uncertainty in market direction, often leading to volatile conditions.

2. Investor Sentiment Turns Impatient: Investor impatience stems largely from uncertainty about future market trends. After a sharp market decline, many investors believe there’s limited room for further drops but remain doubtful about whether a strong bull market will emerge. As a result, they fear being trapped when buying and missing out when selling. They often chase rising prices and panic-sell during declines. Such impulsive behavior exacerbates market volatility.

3. Market Structural Adjustments: Structural adjustments are an inevitable phase in a partial bull market. After a market rally, as early-stage hotspots lose momentum, the market naturally enters a structural adjustment cycle. This allows accumulated profits to be digested, facilitating future market growth and enabling strategic reallocation of capital. During structural adjustments, indices often exhibit wide fluctuations.

How to Stay Steady in a Volatile Market

In a volatile market, indices fluctuate repeatedly within a certain range, neither breaking downward nor rising upward. During such unstable periods, where future trends remain uncertain, the primary focus for investors should not be profit or recovery but stability.

This requires not only a calm mindset but also a prudent approach to trading. Key strategies include maintaining a reasonable portfolio structure, avoiding unnecessary impulsive trades, and refraining from rushing to buy the dip or chasing short-term gains.

An over-leveraged position can heighten anxiety about short-term market movements. In contrast, holding half-position allows investors to lock in profits when prices rise and buy low when prices fall, fostering a steadier mindset.

Conservative investors should adopt a long-term perspective, favoring undervalued blue-chip stocks to minimize corporate performance risks and ensure mid-to-long-term stability.

For short-term traders, speculative stock investments should be limited in size, with profits realized promptly based on market changes. Avoid over-pursuing profits in every trade; if the market shifts abruptly, exit decisively even at a loss.

Many investors’ instability in volatile markets stems from a fear of missing out (FOMO) on potential rallies. This leads to erratic buying and selling. However, recognizing and following trends eliminates FOMO.

Experienced investors can adopt swing trading—buying dips and selling rallies—without fearing missed opportunities in a bull market, as bull trends develop over time, making any entry point valid once the trend is established.

In summary, investors in volatile markets must maintain composure, adopt disciplined habits, and continuously improve market analysis skills to achieve steady returns.

Investment Principles in a Volatile Market
Investors should adhere to the "Four Reductions" principle:

1. Reduce Holding Periods: Volatility can be wide or narrow. Narrow fluctuations often precede trend reversals, especially after declines, potentially forming interim bottoms. Thus, stock selection should focus on mid-to-long-term gains. Wide fluctuations, however, require short-term strategies to mitigate directional uncertainty and risk.

2. Reduce Holdings: Limit the number of stocks held to a few high-quality picks. Over-diversification in uncertain markets hampers responsiveness to sudden events.

3. Lower Profit Expectations: Amid volatility, stock prices swing unpredictably, making mid-to-long-term trends hard to gauge. Set modest profit targets, and for ultra-short-term trades, exit promptly upon gains.

4. Reduce Trading Frequency: Skilled short-term traders can capitalize on sharp price swings, but inexperienced or conservative investors should minimize trades and await clearer trends.