Time Isn’t Timing: When doing nothing is best

Navigating Market Volatility

How often do you see a headline celebrating the billions added to UK pension pots after global stock markets surged? It’s not something that typically grabs attention.

Words like “crash,” “plunge,” “slashed,” and “turmoil” dominate financial news – after all, bad news sells. The problem, however, is that these sensational headlines can heavily influence investor emotions, and as we all know, emotions and money don’t mix well.

We often hear that we should remove emotion from investing, but the reality is that it’s not entirely possible. As human beings, emotions drive our decisions - our hopes, our ambitions for the future, our desire for financial security, and the wish to protect those we love. These feelings fuel our investment choices, making them inevitable, but they can also cloud our judgment when markets get bumpy.

The challenge, of course, is that our emotions often trump logic. We tend to make financial decisions based on feelings rather than cold, hard analysis. Recognising this emotional bias is the first step toward more rational, thoughtful investing aligned with long-term goals.

The Impact of Fear on Your Portfolio

One key emotional bias that often harms investors is loss aversion. This is the psychological phenomenon where the pain of losing money feels far worse than the pleasure of making gains. Studies show that the emotional cost of a loss is typically twice as powerful as the satisfaction derived from a similar gain.

For investors, this fear of loss can have dire consequences. It often leads to selling investments at the first sign of trouble or, conversely, holding on to poor-performing assets out of sheer fear of taking a loss. Neither approach is conducive to building wealth over the long term.

And the problem with trying to avoid losses entirely is that volatility is part and parcel of investing. Economic setbacks, geopolitical tensions, or sudden market shocks will happen—it’s not a question of if, but when.

Looking at history, we see just how frequent market downturns can be. Over the past 20 years, global equities have experienced declines of 5% or more in nearly every year. Eleven of those years saw declines greater than 10%, and five saw drops of 15% or more. The Global Financial Crisis and the COVID-19 pandemic, for instance, resulted in crashes of over 20%.

In other words, there have been plenty of opportunities for investors to panic.

Why Staying Invested Matters

What’s crucial, however, is that these market drops are typically short-lived. The steepest declines often happen rapidly, but the biggest market recoveries tend to follow closely behind.

Investors who panic and sell when markets dip risk missing out on these recoveries. This is especially significant because major gains are often clustered just after sharp falls.

Consider this: global equities have delivered an annualised return of over 700% over the past two decades. For those who remained calm and stuck with their investment plans, patience paid off handsomely.

A Lesson in Investor Panic: The $8.56 Trillion Sell-Off

One recent example illustrates this perfectly. In early April, global markets panicked following President Trump’s ‘Liberation Day’ tariff announcement. News outlets reported that $8.56 trillion was wiped from global stock market values within a matter of days. The US S&P 500 index even suffered its worst two-day performance on record.

It is easy to see why investors might have hit the sell button in that moment. But less than a month later, the US stock market had completely recovered, with Wall Street experiencing its longest winning streak in two decades.

This was yet another example of why it’s so important not to let short-term market turmoil lead to long-term mistakes. The initial panic created by the tariff news ultimately gave way to a recovery, highlighting the perils of reacting based on fear.

Preparing for the Next Round of Market Volatility

No one knows exactly when the next period of volatility will strike. But one thing is certain: it will come.

When it does, it is essential to remember why you invested in the first place. Instead of getting caught up in the moment and making decisions driven by fear, take a step back. Don’t allow your focus to shift from long-term goals to short-term reactions.

In investing, patience truly is a virtue. It’s crucial to stay focused on your long-term strategy, regardless of market fluctuations. By doing so, you position yourself to benefit from the inevitable recoveries that follow periods of volatility.

Investments Carry Risk. The value of your investment (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 guide to the future.