Although equity markets have thus far proved remarkably resilient in the face of geopolitical and economic risks, it is hard not to argue that we are in an environment of heightened uncertainty. Dispersion within equity markets has been extreme, asset prices are moving dramatically on a single tweet, and there is a daily torrent of erratic news flow. This is clearly a difficult backdrop for investors. Perhaps its most worrisome feature is the temptation to do two things we really shouldn’t.

What are these two things?

• Timing market movements.

• Concentrating our portfolios.

These are both usually bad ideas, but they are particularly pernicious in febrile financial markets. Unfortunately, our desire to undertake such actions seems to be strongest at the worst possible moments.

Time to Time

It seems odd that a reaction to rising market uncertainty is an increasing desire to predict how the market will move, but this is inescapably the case. We have an inherent discomfort with ambiguity, and by investing as if we know the future it can give us a sense of control. We can’t bear to sit and let markets happen to us.

To add to this, we are also loss averse. When people talk of market uncertainty what they really mean is that investors are worried that the chances of losing money are increasing. This is why most market timing behaviour is an attempt to get out of risky assets before a major fall, and then get back in at just the right time.

Trying to invest in such a fashion is a sure route to bad outcomes. Not only is the chance of us getting the initial timing correct incredibly low, but even if we are right we then need to keep making similar decisions. Getting in, and back out again. And what about next time? Do we try to repeat the trick every time we feel that markets are at a precarious point?

We have an incredibly strong instinct to act and to do ‘stuff’ – don’t just sit there, markets are moving! For investors that often means trying to make predictions about what happens next. While the urge to do this can feel irresistible, it flies in the face of the evidence about what is likely to work for us over time.

Lacking in Concentration

It is not just the temptation to trade and predict that arises during periods of heightened volatility and unpredictability – we are also likely to become more concentrated in our portfolios. If we see wide levels of dispersion across stocks, styles, asset classes or sectors, our instinct is to think: “Why am I owning these laggards? Why shouldn’t I focus on the winners?”

This is another form of market prediction, but in a different guise. When we see major performance dispersion in areas of the market (such as energy and software recently), and the compelling stories that are used to explain it, we can’t help but extrapolate. If this trend is going to go on forever, then all we need to do is focus on the right parts of the market.

Losing sight of the principles underpinning prudent diversification is a dangerous game, and can be extremely punitive in choppy markets where dispersion is wide. The cost of not holding certain assets or areas of the market can be heavy if we end up on the wrong side, which at some point we inevitably will.

The idea that diversification is a free lunch has always been a naive one, because it ignores the behavioural element. Being diversified means owning things that are performing poorly and that, in certain environments, we should expect to perform poorly. It is incredibly difficult for investors to embrace this idea – we just want to hold the good things that have been working.

Although I have framed market timing and concentration as distinct activities, they are – in essence – both a form of overconfidence in our ability to predict the future. It’s not that investors are gaining confidence as markets become ever more tricky to anticipate; it is rather that the sense of anxiety stemming from rising volatility makes us behave in ways that appear as if our confidence is on the rise.

Attempting to engage in more difficult activities as a reaction to a feeling that conditions are becoming increasingly challenging is an odd and costly path, but a very human one.

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The sense that markets are unusually uncertain is the time when behavioural discipline matters most, but also when we are highly likely to abandon it. Market timing and portfolio concentration feel right, but really they are just the easy options that make us feel good, while being very unlikely to work.

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My first book has been published. The Intelligent Fund Investor explores the beliefs and behaviours that lead investors astray, and shows how we can make better decisions. You can get a copy here (UK) or here (US).

All opinions are my own, not that of my employer or anybody else. I am often wrong, and my future self will disagree with my present self at some point. Not investment advice.