A myriad of factors can contribute to equity market volatility, such as the health of the economy, unexpected policy changes, geopolitical tensions or other exogenous shocks. Psychologically, the unpredictable ride can be unnerving for investors. Although the immediate reaction may be to exit the market in search of calmer waters, history demonstrates that may not be the best course of action.
Below, we have outlined several considerations that help put volatility in context, so you can remain focused on achieving your long-term investment objectives.
Markets Don’t Move in a Straight Line
Market volatility is an inevitable fact of investing, as the S&P 500 has undergone an average intra-year pullback of more than 13% since 1946. Despite these declines, the stock market has delivered positive annual returns 70% of the time since 1946.
Regardless of whether a selloff occurs with a recession or not, even more important is the fact that the market rises over the long run, recouping losses.
As you can see, bear markets such as the COVID-19 recession (2020), the great recession (2007 to 2009) and the dot-com recession (2001) were all accompanied by heavy market declines. But importantly, each time the market recovered and reached new highs.
Periods of Uncertainty Often Deliver Attractive Forward Returns
When headlines shake the market, investor sentiment can weaken dramatically. However, this decline in confidence can be viewed as a contrarian indicator and may be a signal for better days ahead. In fact, history suggests that when sentiment reaches extreme levels, equity markets typically deliver attractive returns one or two years out. In order to reap the benefits, you need to stay invested.
Similarly, periods of high uncertainty around fiscal and monetary policy have historically produced attractive equity returns one year out. On average, when you have elevated levels of policy uncertainty the S&P 500 returns over 20%, more than double the return following periods of low uncertainty.
It’s Time in the Market, Not Timing the Market
If you exit the market when things get bumpy, you are likely to miss out on the biggest gains each year because the best month often follows the worst. In fact, in the two months prior to the S&P 500's best month, returns are usually negative and below average.
Not only is panic selling harmful for annual returns, but the damage compounds over time. Over the last 35 years, missing the top month of each year would reduce your annualized U.S. equity return by 7% compared to if you had stayed fully invested. And if you missed the top two months each year, your returns would be negative.
To put that in dollar terms, let’s assume you made a $1 million investment in the S&P 500 in January 1990, and you remained fully invested through May 2025. That investment would have grown to about $33.8 million. However, if you missed the best 10 days throughout that period, your returns would drop to less than half of that, at roughly $15 million. Missing the top 30 days would prove more costly, cutting your portfolio down to about $5.1 million.
Keeping a Long-term Perspective
When volatility strikes, remember to:
- Think long term: Avoid focusing on short-term market gyrations, as equity markets tend to move higher over the long term.
- Stay the course: Don’t react with emotion by pulling money out of the market or you may miss the recovery.
- Diversify: By diversifying across stocks, bonds and lower correlated asset classes, you can smooth out the ride.
- Stay disciplined and invested: With the right mindset, sticking with your investment plan through the market’s ups and downs will help you accomplish your long-term goals.
