Deepseek “wobble” – how investors can handle market turbulence
What should you do when markets are shaken? This is exactly what happened in late January 2025, as news of a rising Chinese startup called DeepSeek hit the headlines.
Many investors quickly sold their shares in US-based tech stocks, fearing that China’s cheaper chatbot would imminently burst the US boom in artificial intelligence (AI).
Chipmaker Nvidia lost $600 billion in market capitalisation in a single day (a 17% drop – the biggest one-day fall in US history). However, just over a week later, Nvidia’s share price was climbing back up. The initial panic over DeepSeek seemed to have calmed.
What lessons can investors learn from this example of market turbulence? Below, our Grantham financial planners explain how our human psychology can affect investment decisions during a market “wobble” and ways to address them.
Why do investors panic in a market “wobble”?
There are several possible reasons. However, two powerful forces are often at play within an individual when markets suddenly plunge: loss aversion and herd mentality.
Loss aversion is a deeply ingrained mental bias. It instinctively tells us that losses are more significant than gains of the same value. For instance, a £100 loss usually brings more intense feelings of privation than the pleasure felt from a £100 gain.
For example, an investor might sell falling shares in a panic “(What if the price keeps falling and I lose more money?”). However, if the price later goes back up and surpasses its past nominal value, the investor stands to lose out on the recovery.
Loss aversion is often exacerbated by herd mentality. As a clan-based species in origin, humans find it hard to resist the urge to follow the crowd. If we see a crowd suddenly fleeing a nearby treeline, we instinctively want to follow (“Why is everyone running? They must have seen something dangerous!”).
Similarly, if we see countless investors suddenly abandoning a company, the same urge arises within us. However, large crowds can be wrong. Just because the majority seems to think an investment is “doomed” or “destined for greatness” does not mean it is.
We can see this clearly in recent history. The Dot Com bubble of 2001–2002 is a case in point. Internet service and technology companies were widely seen as “the future”, leading to large investment inflows and skyrocketing valuations. However, after the Fed pushed up interest rates in early 2000, borrowing became more expensive for these companies and investors started to sell in a panic. Over the next two years, the tech-dominated Nasday fell from 5,048 to 1,139, wiping out nearly all of the gains from the 1995–2000 tech boom.
Becoming a resilient investor
How can investors navigate these cognitive biases effectively?
A great starting point is to have a strong investment plan before entering the market. Here, you establish your long-term goals, capacity for loss, risk tolerance and investment horizon so you can base any investment decisions on more objective criteria (rather than knee-jerk reactions).
It helps to be aware of your emotions and subject yourself to “stress tests” to see how you might react in different market conditions. Our Grantham financial advisers regularly help clients ask themselves highly-focused questions to achieve this.
For instance: “If your portfolio suddenly crashed by 20% tomorrow, how would you feel and react?” If you know you would face an overwhelming urge to exit the market, this could indicate a more “cautious” risk tolerance. As such, it may be appropriate to lean your portfolio more towards “safer” investments (e.g. like A-grade bonds) to limit your exposure to volatility.
Investors can also fight their biases by having good reasons for picking their investments. If you know that the fundamentals of your holdings are strong (e.g. asset mix and portfolio diversification), you are less likely to be swayed by headlines. Remember, markets are driven by emotions in the short term but fundamentals in the long term.
Diversification can help reduce risk and cushion against market downturns – i.e. spreading your money across multiple markets, assets and companies. Many investors also benefit from using a “pound-cost averaging” approach to investing. This involves investing a regular fixed amount, regardless of market conditions. This can reduce the impact of volatility and lower average cost over time.
Invitation
Staying calm and disciplined in the markets is not easy. Even very experienced investors can struggle with their emotions and make impulsive decisions that they regret later.
This is where working with a financial adviser can help. It provides a second pair of eyes on your portfolio to help you rationalise decisions. A professional can also act as a sounding board for your worries and questions about the markets, helping you to see things you may have otherwise missed on your own.
If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.
