These reassuring facts could help you stay calm and make sensible investing decisions during market volatility

In August, investors faced a rollercoaster of emotions. Weak US jobs data coincided with the Bank of Japan raising interest rates, leading to a global sell-off of equities at the start of the month.

Major indices across the world fell sharply, though fortunately, by the end of the month, markets had rebounded.

This level of volatility often causes understandable concern for investors. When markets began to fall at the start of the month, you might have felt nervous about the potential for further losses.

So, how can you stay calm and ensure you make the most sensible decisions for your wealth despite these fears?

Sometimes, historical data and trends can help to reassure you about the stock market’s capacity for recovery. Though past performance does not guarantee future performance, knowing how markets have performed in the past could help to provide reassuring context.

Read on to learn two helpful facts based on historical trends and market data that could help you stay calm even when markets become volatile.

1. The longer you hold investments, the more chance they have to recover from volatility

When you start investing, one of the most important factors driving your decisions will be the goal you’d like to achieve as a result. Perhaps you’re saving towards an early retirement, a dream holiday, or to be able to support your family financially. No matter what you’re working towards, though, your goals will likely all be long-term aspirations.

We usually recommend that you invest with a time horizon of at least five years, as this gives your investments a chance to recover from the normal rise and fall that we expect to see on the stock market.

A “bear market” is the term given to a period when stock markets fall by 20% or more from a recent peak, while a “bull market” is when stock markets rise by 20% or more from a recent low.

While bear markets happen relatively frequently, Schroders reports that bull markets have historically lasted far longer than bear markets. Moreover, the gains made during bull markets tend to far outstrip any losses experienced during bear markets, as you can see from the graph below.

Source: Schroders

So, though volatility can be nerve-wracking while it’s happening, you may feel reassured to know that these periods don’t tend to last long on the stock market. Moreover, the longer you hold your investments for, the greater their chances of recovering from volatility and returning to growth.

2. Usually, it would take longer to recoup losses if you moved your wealth to cash after market falls than if you stayed invested

Timing the market is a technique that some people employ in an attempt to benefit from stock market rises while missing the falls. But this technique has been proven to be extremely risky, and usually hinders your wealth accumulation in the long term.

The strategy involves moving investments to cash after the market has fallen by a certain percentage, then re-investing your wealth when markets have risen by a certain percentage.

Yet data has shown that it is virtually impossible to miss the worst days in the market without also missing the best days.

CNBC shares insights to demonstrate this using the example of a $10,000 investment in the S&P 500 between 1 January 2003 and 30 December 2022.

According to the report, 7 of the 10 best days on the market in this time frame occurred within 2 weeks of the 10 worst trading days. This shows just how easy it would be to miss the best days in the market if you were also attempting to miss the worst days.

Moreover, the graph below reveals how much your portfolio might have been worth depending on how many of the best trading days you missed within this period.

Source: CNBC

As you can see, staying invested through the two decades could have resulted in a portfolio worth $64,844. But missing just 10 of the best trading days could have left you with a portfolio less than half that value.

Indeed, if you’d missed the 40 or more of the best days, you would have lost money over the course of the two decades.

So, when markets become volatile and other investors begin to panic, remember that staying invested has historically been the more sensible action to take. Past performance does not guarantee future performance, but hopefully this data can help to reassure you of the stock market’s potential for recovery over time.

Get in touch

If you’d like to learn more about how our team of financial planners in Towcester can help you to create an investment portfolio that helps you achieve your long-term goals, please get in touch.

Email theteam@fortitudefp.co.uk or call us on 01327 354321.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.