How much longer will the volatility last?

Why is a dollar-cost averaging strategy more advantageous in volatile markets?

Recently, the A-share market experienced significant fluctuations. The Shanghai Composite Index closed below 4,000 points on March 20, and further declined to around 3,800 points on March 23, with a daily drop of over 3%. The Shenzhen Component Index and the ChiNext Index also declined simultaneously. In fact, with the escalation of tensions in the Middle East, not only are A-shares affected, but global stocks and gold are also impacted. Japan and South Korea’s markets suffered heavy losses this week—Japan’s stocks fell nearly 3.5%, South Korea’s nearly 6.5%, and spot gold dropped below $4,000 per ounce.

Many investors may feel anxious—how long will the decline last? How big will it get? What should be done now?

What’s happening?

Currently, the US-Iran conflict is influencing various asset classes worldwide, and there’s no sign of easing. According to CCTV News, on March 21, U.S. President Trump posted on social media demanding Iran fully open the Strait of Hormuz within 48 hours; otherwise, the U.S. would strike and destroy Iran’s power plants. As reported by The Paper, U.S. Treasury Secretary Janet Yellen, when asked on March 22 about Iran and whether Trump plans to de-escalate, said the U.S. is destroying Iran’s facilities and that sometimes “you have to escalate first to de-escalate.”

Geopolitical tensions have caused oil prices to surge, with international oil prices rising over 40%. WTI crude oil temporarily surpassed $100 per barrel.

What are the main reasons for the recent sharp decline in the A-share market? Xin Qian from China Merchants Securities Global Fund Management Department explained that the recent movement of A-shares is essentially a reaction to the pricing of the US-Iran conflict and rising oil prices. Japan and South Korea’s markets had already adjusted earlier in March, but A-shares and U.S. stocks are somewhat different—they are in a later stage of pricing, so their response has been relatively delayed. This is because non-U.S. markets like Japan and South Korea are more affected by dollar liquidity shocks. After geopolitical shocks, some non-U.S. investors tend to sell their local stocks and shift to U.S. stocks for safety, which may partly explain why the Nasdaq and U.S. markets have recently performed relatively strongly. Meanwhile, the liquidity in A-shares is less correlated with the dollar, so the market’s reaction to oil prices tends to lag.

How long will this impact last? Qian said that since recent market volatility is driven by external events, it’s difficult to predict when the conflict will end. Therefore, it’s also hard to forecast when the market will stabilize. From the public statements so far, the conflict appears to be escalating, and high oil prices may persist for some time. The extent of market reactions remains uncertain. However, compared to other markets, China’s energy structure is more diversified. Benefiting from the “dual carbon” strategy, China’s electrification has rapidly increased in recent years, reducing reliance on oil. Fundamentally, China’s economy has not undergone fundamental changes, so the impact on China’s financial markets may be relatively smaller.

In the coming days, the situation continued to fluctuate with multiple updates following U.S.-Iran statements, maintaining high volatility. Major asset classes responded quickly to these developments.

Should you panic?

In markets with sharp fluctuations, what should investors do?

Anxiety during declines or volatility is often related to a psychological phenomenon called “anticipated regret.” Usually, regret is retrospective—regret over what has already happened. Anticipated regret, however, refers to the expectation of future regret—an anticipatory feeling that influences decision-making to avoid potential future remorse.

After a period of decline, many investors, driven by inertia and panic, worry that the downturn will continue and that a trend has formed that’s hard to reverse. When they see their heavily weighted stocks plummet, they imagine future “limit-down” days. But in reality, stock price formation is a complex system influenced by many factors. The decline might be due to deteriorating company fundamentals, or it could be a market-wide oversell driven by panic, or emotional misjudgments of individual stocks. The latter two causes are often unrelated to the company’s actual quality and are usually unsustainable.

If investors fail to understand this, they may develop regret over not selling earlier when their fund’s net value drops, leading to panic selling and missing subsequent rebounds. Conversely, investors without holdings might impulsively buy in, fearing they missed the bottom, only to buy at a higher point. Both “cutting losses” and “bottom-fishing” are driven by anticipated regret—rooted in short-term market guesses and misjudgments of market trends.

Therefore, it’s best for investors not to focus too much on short-term declines. Instead, they should look at the long-term fundamentals and whether they have changed.

A more cost-effective approach during declines

Many investors ask: if I don’t know whether the decline will last a month, three months, or half a year, should I do nothing? Compared to waiting passively for the market to recover, using the decline and volatility periods to accumulate positions through dollar-cost averaging (DCA) is a better choice. DCA may be suitable for most ordinary investors.

The purpose of DCA is to spread out purchases over time, smoothing out investment costs, reducing volatility, and easing the challenge of market timing—especially useful when investors are uncertain about future trends.

Historical data shows that in volatile markets, DCA outperforms lump-sum investing. We simulated a 12-month volatile period (from September 30, 2023, to September 30, 2024), during which A-shares and Hong Kong stocks experienced continuous fluctuations and a rally in September 2024. The results indicated that, during this period, the returns from DCA were significantly higher than those from lump-sum investment across various indices, including A-shares, Hong Kong stocks, and equity funds.

Data sources: Wind, 2023/9/30–2024/9/30.

Simulation method: Starting September 30, 2023, invest 1,000 yuan on the 1st of each month. By September 30, 2024, there are 12 investments. Return rate = (latest asset value – total invested) / total invested. Transaction costs are not considered. This simulation is for reference only and does not guarantee actual returns or serve as investment advice. Past performance does not predict future results. Investment involves risks; please choose carefully.

What about longer-term performance? Let’s look at the past five years. The table below estimates returns from early 2021 to the end of 2025, a period during which A-shares and Hong Kong stocks experienced significant volatility. Over longer periods, DCA’s advantage over lump-sum investing becomes even clearer.

Data sources: iFind, 2021/1/1–2025/12/31.

Simulation method: Starting January 1, 2021, invest 1,000 yuan on the 1st of each month. By December 31, 2025, there are 60 investments. Return rate = (latest asset value – total invested) / total invested. Transaction costs are not considered. This simulation is for reference only and does not guarantee actual returns or serve as investment advice. Past performance does not predict future results. Investment involves risks; please choose carefully.

Since 2021, A-shares have experienced a prolonged downturn. Even if investors bought at the peak in 2021, sticking with DCA through subsequent declines would have yielded better results than doing nothing after a lump-sum purchase.

Of course, DCA is not a panacea. It doesn’t guarantee profits and is more suitable for certain market phases. In a strong, steady upward market, lump-sum investment might outperform DCA. DCA is simply a straightforward, practical strategy that helps investors develop discipline and stay rational.

Markets will always fluctuate. Short-term volatility or corrections are never reliable indicators of investment value. Driven by anxiety, “cutting losses” or blindly “bottom-fishing” often causes us to lose sight of our original goals amid the chase for gains. The real key to surviving market cycles is a clear understanding of macro trends, firm adherence to your investment logic, and maintaining a rational mindset that isn’t swayed by short-term ups and downs. Investing is a long journey—long-term perspective and rationality are the foundations that support us to the finish line.

References:

1. Zeelenberg, M 1999, “Anticipated regret, expected feedback and behavioral decision-making,” Journal of Behavioral Decision Making, vol. 12, pp. 93-106.