Posted on 07/08/2025 by Mark Dunning
Market volatility is an inherent feature of financial markets, often provoking concern among investors. Whether triggered by economic downturns, geopolitical uncertainty, or global crises, periods of heightened market turbulence tend to elicit strong emotional reactions, frequently prompting impulsive decisions to withdraw from investments. While such responses may appear rational in the short term, the evidence overwhelmingly suggests that remaining invested through volatile periods is the more prudent strategy for achieving long-term financial success.
Volatility refers to the degree of variation in asset prices over a given period, typically measured by statistical metrics such as standard deviation. High volatility is characterised by sharp price fluctuations, whereas low volatility indicates more stable valuations. Importantly, volatility is not inherently negative, rather, it reflects the dynamic nature of markets as they respond to new information, evolving economic indicators, and shifting investor sentiment.
In the UK and globally, markets have experienced multiple episodes of significant volatility in recent decades - from the financial crisis of 2008 to the uncertainty surrounding Brexit and the market shocks induced by the COVID-19 pandemic. Each instance has tested investor resolve and underscored the challenges of navigating uncertain environments. Yet, history consistently shows that markets recover over time, rewarding those who maintain a steady course.
Market timing is the practice of attempting to predict market peaks and troughs to buy low and sell high – this remains a widely pursued but ultimately flawed investment strategy. Even professional fund managers, with access to extensive data and analysis, rarely succeed in consistently timing the market. For individual investors, the risks are even more pronounced.
Research demonstrates that missing just a handful of the best-performing days in the market can dramatically erode overall returns. For example, a study by Fidelity Investments found that missing the ten best days of the market over a 20-year period could reduce an investor’s total return by more than half. These best days often occur clustered around volatile periods, meaning that investors who sell during downturns risk missing the very rebounds that drive recovery.
Moreover, frequent buying and selling in reaction to volatility can incur transactional costs and trigger tax liabilities both of which erode investment performance. This is particularly relevant in the context of tax-efficient vehicles such as Individual Savings Accounts (ISAs) and pensions, where long-term holding maximises the benefits of tax sheltering and compounding.
Participation in market recoveries
One of the most compelling reasons to remain invested during volatility is to ensure participation in subsequent market recoveries. Historically, after periods of significant declines, markets have tended to rebound strongly, often recovering losses within months or a few years. Those who remain invested benefit fully from this upswing, while those who exit the market may be left on the sidelines, missing critical gains. Look at March 2020 and more recently, April 2025.
Harnessing the power of compounding
The effect of compounding returns (earning returns on reinvested earnings) is fundamental to wealth accumulation. This process relies on remaining invested so that returns can be continuously reinvested and grow exponentially over time. Interruptions caused by withdrawing during volatile markets can significantly disrupt compounding, reducing the overall portfolio growth potential.
For example, by staying invested, investors in ISAs or pensions can benefit not only from compound returns but also from the tax advantages these wrappers provide, further enhancing growth prospects.
Mitigation of emotional and behavioural bias
Market volatility often triggers emotional reactions such as fear, anxiety, and panic. Such emotions can lead to impulsive decisions, including selling at market lows and missing subsequent recoveries. Maintaining discipline through a long-term investment strategy helps to counteract this behavioural bias, promoting rational decision-making grounded in financial planning rather than market sentiment.
Working with a qualified financial adviser can provide invaluable support in this regard. Advisers offer objective perspectives and help investors stay focused on their goals, avoiding knee-jerk reactions that can impair long-term performance.
Opportunity to acquire assets at attractive valuations
Periods of market volatility often present opportunities to invest in high-quality assets at discounted prices. Investors with regular contribution plans or spare capital can take advantage of lower valuations to purchase additional units or shares, thereby lowering their average cost base and positioning their portfolios for enhanced future returns when markets stabilise.
This approach, often referred to as ‘buying the dip’ or ‘pound cost averaging’ requires both courage and conviction but can significantly improve investment outcomes over time.
Investors can employ several practical strategies to manage volatility effectively:
Volatility is an intrinsic and unavoidable aspect of investing. Whilst it can be unsettling, it also creates opportunities for disciplined investors to enhance long-term returns. Evidence strongly supports the strategy of maintaining market exposure during volatile periods rather than attempting to time exits and re-entries. By embracing a patient, well-structured approach, investors can mitigate the risks of volatility, harness the power of compounding, and position themselves for sustained financial growth.
Seeking advice from a qualified financial professional can further strengthen one’s approach, providing tailored strategies and emotional support essential for navigating uncertain markets with confidence.
Although every effort has been made to ensure that the information provided in this article is accurate and correct, the information provided does not constitute any form of financial advice. We recommend that you take financial advice before making any financial decisions.
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