Stocks pull back as volatility rises. What should investors do?

What happened?

After a strong run-up earlier this year, the S&P 500 and Nasdaq index have pulled back in recent weeks. 

Markets that were hitting fresh record highs just a short while ago are now experiencing renewed volatility. 

Many investors are wondering whether this correction is temporary or a sign of more instability ahead.

In this week’s Beansprout podcast, I spoke with Karen Lim, Managing Director and Retail Sales Head for Southeast Asia at AllianceBernstein, about how investors should think about volatility during periods of market weakness. 

Karen explains why volatility is not something to fear, why it often spikes after markets hit new highs, and how investors can stay resilient through cycles of sharp rallies and quick pullbacks.

Catch the full conversation in the video below.

Key takeaways for investors from interview with Karen Lim, Managing Director & Retail Sales Head (Southeast Asia) at AllianceBernstein: Why volatility isn't always bad

1. Volatility spikes when markets retreat from highs, but it is normal

The recent pullback in the S&P 500 and Nasdaq index is a reminder that volatility often rises after markets hit extreme levels. Investors may feel more nervous now compared to a month ago, but this reaction is normal.

Karen emphasises that volatility is part of the investing journey. After a big run up, price swings tend to widen as markets digest valuations, macro news and changing expectations around interest rates. Understanding this helps prevent emotional reactions when your portfolio drops, even if only temporarily.

The important mindset shift is this. Volatility is not a warning sign, it is simply part of how markets reset. 

Karen notes that this is why some strategies, including the AB Low Volatility Equity Portfolio that applies the QSP framework focusing on Quality, Stability and Price, aim to help investors experience a smoother path during periods like this.

2. Focus on risk adjusted returns

The sharp rally in the Nasdaq index earlier this year made many investors overly confident. When markets pull back, that confidence disappears quickly. 

Karen reminds us that what matters is not just how high returns go during strong markets, but how much risk you took to get those returns.

A strategy that focuses on risk adjusted returns can help smooth both upward and downward movements. 

AllianceBernstein uses a 90 percent upside and 70 percent downside philosophy in the AB Low Volatility Equity Portfolio to help limit large drawdowns and still participate meaningfully in market recoveries.

3. Build a core portfolio that holds up when the S&P 500 falls

When markets pulled back, many investors realised their portfolios were too concentrated in high beta growth stocks, especially those tied to the Nasdaq index.

A resilient core portfolio should participate in long term growth, protect better during downturns, and reduce emotional decision making.

Karen explains that global low volatility strategies are built with this purpose in mind. They rely on a simple QSP framework, which screens for Quality, Stability and Price. 

Quality looks for stronger fundamentals, stability focuses on steadier earnings patterns and price keeps valuations reasonable. 

Together, these criteria help avoid the most volatile parts of the market, including speculative names that tend to fall sharply during corrections.

When markets turn choppy, a portfolio built with such discipline is less likely to collapse, which makes it easier for investors to avoid panic selling.

4. Guard against emotional mistakes as volatility rises

Corrections often trigger strong emotional responses. This includes panic selling, checking your portfolio repeatedly, comparing losses with friends, regretting past decisions or suddenly switching everything to cash.

Karen says this behaviour is driven by loss aversion. Losing money feels two to three times more painful than making money feels good.

The irony is that many investors were not risk averse when the Nasdaq index was climbing. They became risk averse only after prices fell.

Recognising this emotional bias helps you stay disciplined when markets correct.

5. Global diversification matters even more during corrections

When the S&P 500 was rising nonstop, many investors ignored diversification. When volatility spikes, global diversification shows its value.

Karen emphasises that relying solely on Singapore stocks or a handful of U.S. names creates unnecessary concentration risk. Global diversification across regions, sectors and factors helps stabilise returns.

The S&P 500 index may rebound strongly after corrections, but no one knows when. Diversification helps you stay invested with peace of mind.

6. Stick to your plan. Corrections do not last forever

Karen’s final reminder is simple. Corrections are normal. Markets move in cycles.

Investors who try to time the bottom often end up missing the best recovery days. These days historically occur right after selloffs. This is why time in the market matters far more than timing the market.

Even during recent weakness, the long term trajectory of indices like the S&P 500 remains upward. Staying invested through volatility allows compounding to work.

Transcript

0:00 to 2:30 – Why volatility is normal

Karen explains why volatility returns after markets hit highs, why investors feel more anxious during pullbacks, and why no one can reliably predict short term moves in the S&P 500 or Nasdaq index.

2:30 to 6:00 – Understanding volatility and how to manage it

A simple explanation of what volatility means, how price swings reflect market behaviour, and why investors should focus on managing volatility rather than fearing it.

6:00 to 11:30 – Behavioural traps and loss aversion

Karen discusses how loss aversion affects decision making, why investors often react emotionally during corrections, and the difference between being risk averse and loss averse.

11:30 to 16:30 – Lessons from past mistakes

Karen shares an early investing mistake and how chasing hype can lead to steep losses. This leads to the importance of discipline and avoiding FOMO when markets are volatile.

16:30 to 22:00 – How AB’s low volatility strategy works

Introduction to the QSP framework, the aim of capturing most of the upside while reducing downside, and how this approach has helped portfolios remain resilient during drawdowns.

22:00 to 27:00 – Staying invested through market cycles

Karen explains why she added to her investments during the April dip, why timing the market rarely works, and how staying consistent improves long term results.

27:00 to 28:37 – The importance of global diversification

Final thoughts on why diversifying across markets is essential, especially when the S&P 500 or Nasdaq index become volatile, and the advice she would give her younger self.

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