Volatile markets – the impact of missing the best and worst days

Volatility is part and parcel of investing. You must be prepared to lose money in order gain it. It’s the risk you take when investing. 

The good news is, if you invest for the long term, the odds of making a positive return are in your favour. Of course, past performance isn’t a guide to the future.

By staying invested, avoiding emotional decisions and keeping a diversified portfolio, investors can better navigate volatility – and improve their chances of benefiting when markets eventually rebound.

Collapses and comebacks

Market history is littered with crashes over the decades. From Black Monday and the Dot.com Bubble in the 1980s and early 2000s, to the Financial Crisis in 2008 and more recently the pandemic-induced Covid-19 crash in 2020. By definition, a market crash leads to a bear market when there’s a decline of more than 20% from the most recent high.

No two market crashes are the same, but they are normally inherently similar. As Mark Twain put it, “history doesn’t repeat itself, but it often rhymes”.

While the catalyst, economic and policy environment, and speed of every market crash can vary, they share many of the same underlying causes, behavioural patterns, and systemic impact. Another common trait is that markets historically tend to recover eventually, though the path of the comeback and time it takes doesn’t always act in tandem.

The key message in all of this is that markets do eventually recover. The length of time it takes to recover will depend on the catalyst for the crash, the long-term economic damage from the event and how governments intervene to kick start economic activity. Recoveries are never guaranteed on any fixed timeline.

Markets can quickly fight back

There’s a saying that in life that you need to experience the “bad days” to appreciate the “good days”. Investing is no different. 

The chart below shows the ten best performing days and the worst performing days for the S&P 500 index over the last 35 years, and their proximity to one of the opposite ten days.  

As you can see, the worst days in the market are often followed by the best days. Normally, a lot quicker than you may think. The table demonstrates that the best and worst trading days “to and fro” with each other, occurring close together, which highlights that volatility isn’t a one-way street. However, it is a double-sided coin. Negative sentiment can cause markets to drop sharply, but the opposite is also true, and they can quickly snap back into the green if market sentiment shifts.

In the short term, speculating on the stock market is a bit like tossing a coin. Sometimes you’ll guess right. Others, you’ll guess wrong. But we know that, over the long term, markets like the S&P 500 tend to be up more than they are down. So staying fully invested over the long term and not trying to guess the markets next move is the best approach to take. Time in the market, not timing the market.

But don’t just take my word for it, the chart below highlights impact of missing the best days in the market can have on the size of your investment pot.

Read more: five signs you’re speculating not investing

By missing the ten best days in the market over the last 25 years, you could be left with 50% less than those that weathered the storm and remained fully invested. While you’d have to be extremely unlucky to be “out of the market” for all of those golden days, is it really a risk worth taking by dipping your toe in-and-out of stocks? Because many financial shocks follow breaking news where investors are scrambling to gather important information, many of the market’s best days occur during periods of uncertainty, making them difficult to capture if you’ve bailed out.

3 tips to manage volatility that aren’t diversification

1. Avoiding logging in to your account too regularly

We know that the Charles Stanley Direct app is great, but logging in to it on a daily basis to see your investments yo-yoing up and down is unlikely to do much for your mental sanity. The introduction of online trading has made investing more accessible than ever before, but it has its downfalls during market falls when your emotional resilience is tested and hitting the “sell” button becomes more appealing.

2. Look at things through a different lens

A market downturn could present an opportunity to “buy the dip”. If you have capital available to invest for the long term (the keyword being long term), you could look to buy investments from investors that are heading for the exits. Of course, it can also be ill-advised to try to “catch a falling knife” – you never know where the bottom of the market cycle could be and whether you can afford to add risk will depend on your individual circumstances and investment time horizons.

3. Trust the experts

At Charles Stanley, we have been supporting clients for more than 200 years, so we’ve seen our fair share of “bad days in the office”. If you feel like you need to speak to us, you can have a free 15-minute call with one of our expert Financial Coaches. They will listen to you, answer any questions, and advise the next steps. Book your call today.

But please do, diversify, diversify, diversify…

While the repeated message of “diversify” in times of uncertainty might sound a bit cliché and overused. It’s so important when it comes to building resilience into your portfolio, and managing the inevitable bumps along the way.

By spreading your money across different areas, it can help to reduce the impact of any single investment’s ups and downs. That could mean mixing types of companies, holding different kinds of investments like shares and bonds, looking across global markets, or blending investment styles. There are plenty of ways to build a well‑rounded portfolio.

Selecting individual companies isn’t always the most effective – or straightforward – way to diversify. It can often mean buying 50-100 assets to build a well-rounded portfolio which can cost a small fortune in trading fees, stamp duty, FX charges etc. Funds can offer a simpler alternative, with professional managers selecting a broad range of investments on your behalf. Whatever approach you choose, it’s important to review your portfolio regularly to make sure it still aligns with your goals and your appetite for risk.

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