Dan Kemp: why the urge to act can be the costliest move in a market crisis

In times of extreme geopolitical uncertainty such as we’re seeing right now, investment decisions aren’t always made rationally. In this timely reminder, Dan Kemp, Founder, Portfolio Thinking, reinforces the importance of discipline and process – and why sticking to them is what matters most.

As investors assess the latest escalation in the Middle East and renewed uncertainty surrounding Iran, markets have, as they often do in periods of geopolitical strain, adjusted quickly to reflect the new information.

Episodes like this tend to generate sharp, short-term moves across asset classes. What we witnessed was the market’s acute inflammatory response to geopolitical trauma – a rapid and visible reaction to unsettling developments. Such responses are neither unusual nor necessarily durable.

Our responsibility as investors is to distinguish between short-term market pain and lasting structural risk. A well-constructed portfolio is built to withstand these flare-ups without suffering permanent damage.

The greater danger in moments like this is not the volatility itself. It is the overwhelming psychological urge to do something – known as action bias.

In periods of acute macro-volatility, action bias is the single greatest threat to an investor’s wealth. The temptation to reposition, de-risk, hedge aggressively or “wait for clarity” feels sensible. In reality, attempting to time a geopolitical shock is the surest way to convert a temporary market drawdown into a permanent loss of capital.

History is unequivocal on this point. Geopolitical crises generate sharp market reactions. They also tend to generate recoveries long before the news flow feels comfortable again. Investors who exit risk assets in search of emotional relief often miss the recovery that follows.

Another behavioural bias currently dominating markets is extrapolation.

When crude oil spikes 10% in a matter of hours, human psychology tempts us to draw a straight line into the future. Higher oil today must mean dramatically higher oil tomorrow. Higher inflation. Higher rates. Lower equities. The narrative writes itself.

But history reminds us that the most powerful force in finance is reversion to the mean. Elevated energy prices ultimately cure elevated energy prices. Demand adjusts. Supply responds. Substitution occurs. The extrapolation trade rarely ages well.

Meanwhile, Wall Street is attempting to model the outcome of a conflict whose trajectory is unknowable. Analysts are building increasingly precise mathematical forecasts for fundamentally human events. This confuses measurable risk with profound uncertainty.

Risk can be modelled. Uncertainty cannot.

You cannot construct a spreadsheet that predicts the timeline, political resolution or second-order consequences of a geopolitical crisis. What you can construct (and what advisers should be focused on) is a portfolio resilient enough to absorb shocks without forcing reactive decision-making.

True stewardship does not require a hot take to every geopolitical headline. It requires discipline. It requires process. And above all, it requires trust in the resilience of the portfolio that was built long before the storm arrived.

Volatility is not a design flaw in markets. It is the psychological tax we pay for the compounding of long-term returns.

The adviser’s role at moments like this is not to outguess geopolitics. It is to distinguish between discomfort and danger. To ensure that temporary turbulence does not become permanent damage. Because the greatest risk in a crisis is not the headline, it’s the reaction to it.