Typically, market volatility is a given for investors, yet over the last two years investment markets have been relatively calm.
Indeed, the S&P 500 climbed by 24% in 2023, and another 23% in 2024. Considering that historical average returns are usually between 8-10%, and we've experienced no significant or extended declines, these returns are remarkable.
When it comes to market falls, the largest decline in 2023 occurred between July and October where we saw a -10% drop. Meanwhile, in 2024, the worst decline was during a brief 21-day period when there was a relatively minor -8% fall.
While many investors have enjoyed sitting back and seeing the fruits of their disciplined patience, financial journalists have been scratching their heads wondering where to find the shock-factor headlines they rely on!
This is all very good news for investors, though it does mean that you may have forgotten how to ride out the sometimes stressful declines that we typically see in the markets.
As we may well see more significant declines over the next 12 months, here are three points to keep front of mind.
1. Stock market volatility is like the tide – it ebbs and flows
Company values and share market prices don't move in a straight line, though the general trend of the market is upward. Market fluctuation – or “volatility” – is quite normal.
One aspect of volatility that you may see is a market correction – a 10% drop from a previous high.
As an investor, a 10% drop may seem significant, yet these market corrections are fairly regular and happen more frequently than you may realise. Despite the relative calm over the last two years, we usually see this happen at least once every calendar year.
Looking back at history, since the beginning of 2000, the average annual decline has been around -16%. And yet, three in four years have ended in positive territory.
Another historical note on volatility is that, on average, every five years or so we experience declines of more than -30%. Something we last saw in 2020, during the Covid pandemic.
2. It may sound unlikely, but volatility is your friend
As mentioned above, history shows that stock markets typically reward investors with positive returns about three in every four years.
Before you shy away from the single negative year, it’s this that ultimately earns you the positive three.
Volatility is a critical part of investing.
When you invest, you're buying into a share of profits (and potential losses) of hundreds of different global companies. Not every company can enjoy successes every day. And sometimes global events will affect many businesses simultaneously.
It’s these temporary declines that, over time, help to provide investors with positive returns.
The difficulty is that it’s impossible to predict when steep fluctuations might occur, or how long it may take for them to readjust.
Investing has its ups and downs – and market declines will be a fact every investor should get comfortable with.
While it’s natural to feel concern during periods of volatility, the smartest investors will keep their cool, remain invested, and let things take their course.
Indeed, your mindset during periods of market fluctuations is key to your success. While global events will always have an effect on the stock market, staying focused on the long term and ignoring the noise is likely to help you to reach your financial goals.
3. Time is a great healer
Whatever volatility we see in the markets over the next 12 months, it shouldn’t make a material difference to your 30-year investment strategy.
Because you’re investing for the long term, and history has shown that markets typically trend up, you’re well positioned to win.
Ultimately, instead of seeing market volatility as a problem, you could instead view it as a potential opportunity. Following two relatively stable years, should markets dip in the coming months, you may be encouraged to capitalise on events and act in order to make further gains.
While it may seem counterintuitive, if you’re still accumulating, investing when prices are low could be a smart investment decision, and, over the long term, may prove highly lucrative.
It’s impossible to predict where the markets may land at the end of 2025, yet facts and figures can help you remain confident that they will be much higher in 10 years’ time.
Invest with a long-term horizon, and remember that over time, your investments should ride out the short-term blips.
