You wake up, check your phone, and see a news alert that the S&P 500 is down big. Your heart skips a beat. Opening your investment app, you confirm the damage. Your portfolio’s value has significantly dropped.
What do you do?
Do you frantically log in and sell everything before it gets worse? Do you call your financial advisor in a panic? Or do you do nothing and just hope it blows over?
Every investor faces moments like this when the market gets volatile. In fact, we’re entering September – a month infamous for choppy markets. It’s easy to feel alarmed when you see red on the screen. But before you make any rash moves, take a deep breath.
In this post, we’ll explain why market volatility is a normal part of investing, highlight common mistakes to avoid during turbulent times, and outline smart steps for getting through the market’s ups and downs without derailing your long-term goals.
Volatility Is Normal – Keep a Long-Term Perspective
Market “volatility” is a fancy term for market ups and downs. Prices jiggle around daily, sometimes violently. It can be unsettling, as nobody likes seeing their hard-earned savings drop 2%…5%…10% in a short span. But volatility is a normal part of investing. Stocks never move in a straight line forever.
In fact, history shows that you should expect a few speed bumps almost every year. Since the early 1980s, the S&P 500 has experienced a drawdown of 5% or more nearly every single year (only two years escaped this fate). Even declines twice that size, as in “corrections” of 10% or more, happen fairly regularly. And yes, certain periods like September have a reputation for weakness (stocks have fallen in 55% of Septembers since 1928, far more often than in other months).
So when you see a dip, remind yourself that this has happened before.
Fortunately, these drops are usually temporary. In many cases, markets recover relatively quickly from a bout of volatility. Looking at decades of data, the average time to recover from a modest 5–10% market downturn is only about 3 months, and for a deeper 10–20% correction it’s around 8 months on average. Even bear markets (declines of 20%+), scary as they are, eventually give way to new highs. The U.S. stock market has been through 26 bear markets since 1929 and recovered from every single one (26 out of 26) over time, though the duration of each recovery has varied. Of course, past performance doesn’t guarantee future results, but it’s encouraging to know that historically the market’s long-term trend has always been upward despite short-term setbacks.
As long-term investors, we care more about the destination than the bumps along the way. Over years and decades, the general trajectory of a well-diversified market portfolio has been positive, despite countless temporary drops.
Mistakes to Avoid When Markets Get Choppy
When markets start gyrating, our emotions can easily get the better of us. This is totally human. In fact, behavioral finance studies have found that the pain of losing money feels about twice as intense as the joy of gains. However, reacting impulsively to market volatility often leads to costly mistakes. Let’s highlight a few big ones to avoid:
1. Panic selling.
This is the classic error. Your portfolio is down 10%, you feel sick to your stomach, and you sell everything to “stop the losses.” The problem is, by selling after prices have fallen, you turn a temporary paper loss into a permanent real loss. And you often do so at the worst possible time, right near the market bottom. Remember, if you bail out during a plunge, you have to time two decisions correctly: when to get out and when to get back in. Many, if not most, don’t re-enter until after the market has already rebounded, missing the recovery gains. It’s a recipe for locking in low returns.
Look at 2020: in March of that year, the S&P 500 plunged over 30% in a matter of weeks during the COVID-19 panic. It was one of the sharpest crashes ever. Yet by the end of 2020, after massive swings, the index had fully recovered and even finished the year up +16% from where it started. In other words, if you stayed invested, you not only recovered losses but came out ahead by year-end. The only people who got hurt were those who panicked and bailed out at the bottom. This scenario has played out repeatedly in market history.
One famous study (DALBAR’s analysis of investor behavior) shows that over decades, the average individual investor’s returns significantly lag the market because of poorly timed exits and entries. Over the past 30 years, the average equity fund investor earned roughly 8–10% per year while the S&P 500 returned around 10–11% per year. That gap might not sound huge, but compounded over 30 years, it’s enormous, and largely due to behavior, not the investments themselves.
2. Trying to time the market.
During volatility, some folks don’t necessarily panic-sell everything, but they still attempt to outsmart the market. They hop in and out, or delay investing new money, because they think they can catch the perfect moment to buy or sell. However, market timing is extremely difficult and even professionals fail at it consistently.
In fact, many of the market’s best days tend to cluster around its worst days. If you’re out of the market during those big up days, your returns can suffer dramatically. A JPMorgan Asset Management study famously found that 7 of the 10 highest-return days in a 20-year period occurred within two weeks of the 10 worst days.
To put numbers on it, imagine two investors from 2002 to 2022. One stayed fully invested the whole time, and the other stepped out and missed just the 10 best days in those 20 years. The buy-and-hold investor ended up with about a 9.5% annual return, whereas the other investor earned only about 5.3% – roughly half as much.
How to Navigate Volatile Markets
So if the best move isn’t panic or trying to outguess the market, what can you do when volatility hits? I many cases, the right course of action is sticking to your plan rather than making radical changes.
1. Revisit your long-term plan
Remind yourself why you’re investing in the first place. Is it for a retirement that’s 10, 20, or 30 years away? A college fund for a toddler? That context matters. When you have a long time horizon, a market dip today is mostly noise in the grand scheme.
If you’ve built a financial plan with a certain asset allocation designed for your risk tolerance and goals, trust that plan. Volatility will come and go, but a sound plan accounts for that. As long as nothing fundamental in your life has changed (job, income needs, etc.), you generally shouldn’t overhaul your strategy because of a temporary market slide.
2. Check that your portfolio is diversified and balanced.
Diversification means not putting all your eggs in one basket, i.e., holding a mix of different asset classes (stocks, bonds, etc.) and investments across various industries and regions. When one asset zigs, another zags. For example, if stocks are plummeting, high-quality bonds might be holding steady or even rising, softening the blow to your overall portfolio. So in volatile times, double-check that you’re properly diversified according to your plan. If not, speak with an advisor to determine if now is an appropriate time to rebalance or if it would be better to wait until after the storm subsides.
3. Keep up your contributions
If you’re investing a fixed amount periodically (like in a 401(k) each paycheck or an automatic investment plan), you probably shouldn’t stop just because the market is volatile. By continuing to invest during downturns, you’re effectively dollar-cost averaging: buying more shares when prices are low and fewer when prices are high. This smooths out the price you pay over time and can lower your average cost per share.
4. Tune out short-term noise.
One of the best moves during volatile times is to limit your exposure to panic-inducing news. That might mean checking your portfolio less frequently and avoiding the financial news headlines that scream “Markets in Turmoil!” every other minute. Day-to-day, direct your attention elsewhere. Your family, your job, your hobbies.
5. Talk to a professional
Volatile markets are exactly when a good financial advisor proves their worth. A seasoned advisor can provide much-needed perspective and help you avoid knee-jerk reactions. In fact, part of their job is often talking clients off the ledge during scary times and reminding them of the long-term plan. Research shows that having a financial professional’s guidance can counteract those emotional impulses that lead to bad timing decisions.
An advisor can review your portfolio with you and determine if any adjustments are truly needed (perhaps your risk tolerance has changed, or there’s a tactical opportunity to refine your allocation). They’ll likely encourage you to stay the course rather than overhaul everything.
Importantly, they can also re-run your financial plan projections under new market scenarios to show you that you’re still on track (or discuss steps if not). Sometimes just seeing that “Okay, even if my portfolio drops 15%, I can still meet my retirement goal” provides immense peace of mind.
In Conclusion
Market volatility is inevitable. You can’t control when the next pullback or correction will happen, but you can control how you respond. By avoiding panic, sticking to a solid plan, staying diversified, and perhaps even seizing opportunities amid the chaos, you give yourself the best chance of coming out stronger on the other side. And if you need a guiding hand or a second opinion, we’re here for that as well. Volatility doesn’t have to be your enemy – with the right approach, it can be managed and even turned to your advantage.
If you’re feeling unsure about your current strategy or want to discuss how to better protect your finances from volatility, we invite you to reach out. Sometimes a conversation can provide clarity and calm that no headline ever will.
Sources:
- https://www.invesco.com/us/en/insights/investors-stock-market-corrections.html
- https://ca.rbcwealthmanagement.com/mark.d.allen/blog/4636242-Nothing-new-about-September-slides-for-stock-markets
- https://www.invesco.com/us/en/insights/investors-stock-market-corrections.html
- https://www.hartfordfunds.com/insights/investor-insight/investor-behavior/media-replay/the-price-of-panic.html
- https://www.investopedia.com/how-robo-advisors-handle-volatility-11778423
- https://defiantcap.com/sp-500-posts-crushing-recovery-in-2020/
- https://fmpwa.com/the-cost-of-missing-the-10-best-days-in-the-stock-market/
