5 things to keep in mind when market volatility hits

8 minute read

Market volatility can sometimes make investing feel like a rollercoaster ride, with ups and downs stirring emotions from excitement to anxiousness to fear, challenging even the most seasoned investors at times. But understanding how markets work and keeping emotions in check are key to long-term investment success.

This article examines market cycles, dispels common myths about market timing, and provides strategies for navigating market fluctuations. By applying these insights, you can learn to view volatility as an opportunity for growth rather than an obstacle to avoid.

Markets move in cycles, and with them, investor emotions may follow. While having emotions is normal–after all, we're all human–letting those emotions dictate when to buy or sell your investments can affect your investment success.

History shows us that downturns are a part of the market cycle. And so, to achieve your financial goals, rather than being swayed by emotions, do your best to stay calm, even when markets get bumpy.

Figure 1: The ups and down of investing in the market
Performance of U.S. stocks over the past several months

Almost all assets see fluctuations in their value over time. And so, volatility is not new and remains an intrinsic part of the market. It can be driven by various factors, including economic conditions, political and geopolitical events, market sentiment, investor behavior, and market dynamics.

So, while headlines about the next big crash might dominate the news, remember: when in doubt, zoom out. A year with significant drawdowns can still deliver positive returns, as market turbulence and overall performance often tell different stories. In fact, despite experiencing notable drawdowns over the past 15 years, markets have delivered an average 1-year return of over 11%.

Figure 2: Markets can make big comebacks, despite setbacks
Maximum intra-year declines vs. annual returns

Throughout history, there have been many events that have pushed markets lower in the short-term, often leading to arguments being made against investing. All too often, investors think “this time is different.” But, history has shown that markets are resilient, rewarding patient investors who maintain a long-term perspective and tune out the noise – just look at the Big Picture. 

Figure 3: Short-term pain, long-term gain
Major market drawdowns and subsequent recoveries

Market fluctuations can often tempt investors to delay investing or move their investments to cash, waiting for “better” conditions to prevail. However, timing the market is nearly impossible to do consistently and frequently results in missed opportunities, as it requires you to make two correct decisions: when to sell and when to reinvest.

So, trying to time market ups and downs is a bit like rolling the dice, and risks missing out on the best days of market performance, which can significantly impact your long-term investment results. 

Figure 4: The value of staying invested
$10,000 invested in Canadian stocks over the past 10 years 

While volatility is unavoidable part of investing in financial markets, it can certainly be managed. Selecting an appropriate asset allocation aligned with your goals and risk tolerance is one of the most important and impactful investment decisions you can make when investing.

Taking on investment risk doesn't need to be an all or nothing approach. Consider finding a “happy medium” with an investment solution that offers a balanced approach to risk and return. Doing so can help you stay the course through market ups and downs, ultimately increasing your chances of achieving your long-term financial goals.

Scotia Portfolio Solutions leverage the experience of Scotia Global Asset Management’s Multi-Asset Management Team, known for successfully navigating market volatility and seizing investment opportunities regardless of market conditions.

Market fluctuations always has been and always will be inevitable, so when volatility hits, here are three takeaways to remember:

• Stay the course. Reacting impulsively and withdrawing investments during a market downturn is almost never the right move, because trying to avoid the worst days might inadvertently cause you to miss the best days.
• Focus on what can be controlled. No one can control or fully predict market volatility. Following a financial plan can help keep emotional biases in check, instead of letting them get in the way of investing.
• Work with an advisor. A Scotiabank advisor can provide perspective on market volatility and can help you keep on track with an investment strategy that works for you.

So, during periods of heightened market volatility, maintain focus on your long-term goals, remembering that turbulent times, like storm clouds, eventually pass.