In any given year, even years where stock performance is very strong, the market can go—and pretty much always has gone—negative. Sometimes quite negative. While there’s no guarantee that the market will recover from these intra-year dips, it usually does.
This chart shows the depths of intra-year declines in the S&P 500 from 1995–2024 as well as the final returns for the calendar year. Note that there are no years during this period where the market didn’t run negative at some point.
S&P 500: Deepest Intra-Year Decline vs. Final Calendar Year Return (1995–2024)
A few important notes on this:
- In almost every year, the S&P 500 experienced a significant intra-year decline (red bar), but frequently still finished the year with a positive return (blue bar above zero).
- Major crisis years such as 2000–2002 (dot-com bust), 2008 (financial crisis), and 2022 (inflation and rate hikes) show both deep intra-year declines and negative annual returns.
- Years like 2020 (pandemic) had a sharp intra-year drop but finished with a strong positive return, highlighting the market’s resilience and recovery potential.
- The average intra-year decline over the last 30 years is about -14%, even though the average annual return of the S&P 500 during that time is 10.4% (more if you include reinvestment of dividends), underscoring that volatility is normal even in positive years.
In case I haven’t been clear, having negative returns several months into the year is not unusual, and it doesn’t mean the year will be a loser.
The Cost of Exiting the Market
Faced with the kind of volatility we’ve seen at times, many investors are tempted to pull their money out and wait until things settle down.
Understandable. But a mistake. A big mistake.
Investors who exit the market when there’s a substantial disruption incur three primary costs:
Locking in Losses: In their haste to get out of a falling market, investors often sell at a loss. As a practical matter, by the time most of us realize there’s a problem, it’s too late to get out without a loss. Less savvy investors tend to hesitate as well, and are punished with even greater losses.
Missing the Rebound: The best returns often closely follow steep declines. For example, 2009’s 26.46% gain followed right on the heels of 2008’s 37.00% drop, and many of the best trading days follow within a week or two of the worst trading days.
Compounding Impact: One year of missed participation can significantly reduce your long-term wealth.
To illustrate how this works, let’s look at a hypothetical $100 investment made in 1995. An investor who stayed fully invested through 2024 would have seen that investment grow to about $1,950 (10.4% annually).
The same investment made by someone who missed even a few of the top-performing days during that period—such as the post-March rally of 2020—realized drastically reduced returns. Missing the 10 best days in 20 years would have reduced total returns by about 50%. Add in the panic selling to lock in losses and forfeiting the dividends that could be reinvested, and this can further reduce returns by as much as 40%.
Ouch!
7 Reasons to Invest in Volatile Markets
While the uncertainty and unpredictability of a volatile market may cause many to shy away from investing, it is important to recognize the potential advantage of embracing opportunities. Here are seven reasons to invest when the market is volatile, emphasizing the long-term benefits of making sound investment decisions amidst market fluctuations.
1. Capitalize on Discounted Asset Prices
Market volatility often prompts overreactions and irrational investor behavior, leading to price spikes and drops. Such downturns present a unique opportunity for investors to purchase quality stocks and assets at discounted prices. Investors with the patience and discipline to weather these short-term market fluctuations can significantly benefit by buying bargains that can rebound when market conditions stabilize.
2. Take Advantage of Dollar-Cost Averaging
Volatile markets are perfect for dollar-cost averaging (DCA). DCA is an investing strategy that entails investing a fixed amount of money at regular intervals regardless of market conditions. This reduces the chance of just being unlucky and buying at the wrong time.When the market is unstable, DCA allows people to buy more shares at lower prices, thereby reducing the average cost per share over time. Rather than making one big purchase all at once, DCA involves smaller, consistent investments irrespective of the short-term ups and downs in price. The stocks bought during the dips ultimately yield greater returns when the market recovers, further reinforcing the advantages of investing during volatile periods.
3. Probability of Higher Future Returns
There’s a substantial body of research—not to mention historical data—showing that even though volatility can appear daunting in the short term, it tends to be accompanied by higher potential for long-term returns. Strong market downturns have generally been followed by strong rebounds, leading to substantial wins for patient investors. Investors willing to endure these short-term uncertainties can benefit from the subsequent growth potential that emerges during calmer market conditions.
4. Diversify and Manage Your Risk
Volatility emphasizes the importance of diversification and risk management in investment portfolios. In turbulent markets, the values of various assets fluctuate independently. This creates an opportunity for investors to rebalance their portfolios by allocating resources to the assets or sectors that are more stable or undervalued. By diversifying investments across different asset classes and regions, you ensure your portfolio is better equipped to withstand market volatility and mitigate potential losses.
5. Learn and Build Resilience
Investing during market volatility provides a unique opportunity to gain practical experience and resilience. It allows you to see firsthand how markets react to various events and to analyze patterns and trends. You gain an understanding of market dynamics, enabling you to make more informed investment decisions. By embracing volatility, investors grow more resilient and less swayed by short-term market fluctuations.
6. Don’t Try to Time the Market
People will claim they can time the market or that they’re right most of the time. But consider this: if they really could do that, then why haven’t they? We’d all know about them because they’d be uber-wealthy. The successful investors you know about have made a lot of money, but they didn’t do it by timing the market. Studies show that even experienced investment professionals struggle to consistently time market movements accurately.
Rather than trying to outsmart the market, a long-term perspective that is focused on patience, disciplined investing, and diversification tends to yield better results. By investing during volatile periods, individuals are less likely to fall prey to impulsive decisions driven by market sentiment, and instead rely on a strategic investment approach.
7. Create Your Long-Term Investment Strategy
Volatility will help you refine and strengthen your long-term investment strategy. By gaining exposure to both prosperous and challenging market conditions, you can identify your risk tolerance and find asset allocations that align with your financial goals and objectives. Effective financial planning—including an assessment of your risk appetite and diversification strategies—during volatile periods can lay the foundation for a resilient and successful investment approach.
While investing during a volatile market may seem counterintuitive to some, it is in such periods that the most fruitful investment opportunities arise. By capitalizing on discounted asset prices, employing dollar-cost averaging, and recognizing the potential for higher future returns, you can position yourself to benefit from the eventual rebound that often follows periods of market instability.
It is important to remember that long-term investing success relies on a combination of patience, discipline, diversification, and adherence to a sound investment strategy. By embracing market volatility rather than avoiding it, you not only safeguard your financial future but also reap the potential rewards of this opportunistic investing approach.
Stocks Must Be Part of Your Portfolio
I once received a note from a former colleague. He said: “I’m considering taking all my assets out of stocks. Talk me out of it.”
Here’s my response:
Why? As an investing strategy, it’s almost NEVER a good move to cut stocks fully out of your portfolio. There are income and long-term growth opportunities under any market conditions.*
There are shorter-term trading profits to be made in most market conditions as well. So, even if you are absolutely certain the wheels are about to fall off the economic bus, it won’t usually be optimal to liquidate all of your stock holdings.
Bond yields and money market rates are coming down, and commercial real estate at least is even more risky, with the effects of remote work still being unclear. Given that, most of us mere mortals are hard-pressed to come up with a better asset class to invest in than stocks.
Having said that, you may want to reduce your exposure to stocks if you think there’s market trouble ahead. Moving some assets to cash/money market funds—or even gold—could be something to consider if you want to be conservative.You may want to move into more conservative, more defensive stocks. Also, some of the long-term dividend-paying companies can be good stocks to have in the portfolio if you want to be more conservative.As for crypto, that tends to rise along with bull markets, but it also tends to stall in bear markets, so it’s a much riskier place than gold if your goal is capital preservation while weathering a storm.* As a never-say-never type of person, I rarely use terms like “never” or “always”—but in this case, I do. Even in the depths of the Great Depression, there were stocks that performed well. I would also note that it is rarely (never?) a good idea to precipitously get 100% into or out of an asset class and especially risk your entire portfolio on a specific stock.