Navigating Volatility: Learning From History
Market volatility is back, but history shows it's normal and often followed by strong rebounds. Staying invested is key—missing top days can halve returns. Diversification, risk-aware strategies, and long-term discipline can help investors navigate uncertain times.
Key takeaways:
Stock market volatility is back, and periods of market swings tend to coincide with higher levels of economic uncertainty.
Staying invested is critical; missing just a few of the market’s best days, which are often clustered near the worst, can significantly reduce long-term returns. Over the past two decades, missing five of the best days in the market would have cut an investor’s return nearly in half.
Investment strategies that reduce risk through increased diversification or an attractive up and downside capture trade-off can help in a volatile market.
Markets have experienced a sharp uptick in volatility in recent weeks. U.S. President Donald Trump’s large-scale tariff announcement on April 2 exceeded market expectations about the severity of the tariffs. This triggered a swift market reaction, sending the S&P 500 down over 10% in just two days.
While these swings can be unsettling, particularly for long-term investors, it’s important to recognize that periods of heightened volatility are not new. The market has seen similarly large and sharp two-day declines in in the past: in 1987, 2008 and, as recently as March 2020. After each of those periods, the market rallied over 9%, which is similar to the 9.5% rally seen in the S&P 500 on April 9 of this year, which was one of the best days in markets since 1950.
This is the first time markets have responded in such magnitude to this particular type of uncertainty—trade and tariff policy—but it’s far from the first time investors have faced turbulence. From the global financial crisis in 2008 to the COVID-19 pandemic in 2020, history has shown us that volatility is a feature of markets, not a flaw.
As Mark Twain once said, “History doesn’t repeat itself, but it often rhymes.” The rhyme here? Volatility emerges around concerns and uncertainty about the impact on the economy (and thus the implication for company earnings and profits). While each big period of economic uncertainty has different root causes, the act of studying how investors and markets react in these periods shows that these times have something in common – investors often overreact.
Periods marked by frequent single-day swings of plus or minus 2% in the S&P 500 are typically driven by economic uncertainty. In 2008, at the height of the financial crisis, 72 out of 253 trading days saw that level of movement. In contrast, 2017 saw no such trading days. These moments of dislocation represent markets actively seeking clarity and direction—not just losses. In fact, 2022 - characterized by peaking inflation and aggressive rate hikes - is a prime example: While the S&P 500 declined 18% for the year, half of the 46 most volatile days were gains.
Historical data underscores this dynamic. In years with more than 10 high-volatility days, average S&P 500 returns hovered around zero and annual GDP growth was slower. But in calmer years—those with fewer than 10 such days— annual returns averaged nearly 20%, and GDP growth averaged 3%. Over time, these patterns suggest that volatility is often followed by strong recoveries in both markets and the broader economy.
Staying the course matters
One of the most critical investing lessons from the past two decades is that the best and worst trading days live in the same neighborhood. In March 2020, investors saw three of the worst trading days since 1950—and five of the best—all within the same month. On March 16, 2020 alone, the S&P 500 dropped 12%. Yet one year later, the index had rebounded by 69%.
Missing just a handful of these "best days" can significantly impact long-term performance.
Investment strategies for a volatile market
In an environment characterized by higher volatility, investors may want to consider looking for other ways to minimize risk. Possibilities include introducing other, less-correlated asset classes or emphasizing less-volatile instruments and funds. One measure of this is to look at the “capture ratio” of a fund or investment. This metric quantifies performance relative to its respective market or benchmark in both up and down markets. A capture ratio of one means the portfolio is moving in sync with the market at large. A fund with an upside capture ratio above one and a downside capture ratio below one would represent a rare but very attractive trade-off. The Minimum Volatility asset class has consistently delivered attractive asymmetrical returns.
Delivering an asymmetric capture ratio can be a key to success but difficult to find
The power of preparation can help make the emotional rollercoaster ride of the markets smoother and less emotionally volatile. For example, in a volatile market, increasing contributions to tax deferred accounts (401(k), IRA, 529 college savings), putting cash to work in a portfolio, tax loss harvesting or rebalancing a portfolio can help better position you for success going forward. That way, when emotions threaten to drive panic selling, there are guidelines that can be followed to stop impulsive actions.
For those wondering what today’s volatility means for their portfolios, the answer may lie in what markets have already taught us: Stay invested, stay focused and let long-term discipline do its work.