Misunderstanding Volatility
With recent market disruption stemming from tariffs, I thought now would be a good time to revisit a concept that causes many investors to make poor decisions—volatility.
Before we go any further, let’s clarify a couple of key terms:
- A correction is a drop in equity prices of 10% to 20%.
- A bear market is a decline of 20% or more from a recent peak.
These movements are normal, and yet they often trigger emotional reactions that lead to long-term investment mistakes.
The Historical Perspective
History is our most reliable guide. As President Truman said, “The only thing new in the world is the history you don’t know.” Or, as Churchill put it, “The longer you can look back, the farther you can look forward.”
Since 1980, the S&P 500 has experienced an average annual decline of about 14%. Every five or six years, the market tends to drop double that. And yet, despite all this volatility, the market has continued to grow over time. You can find a full history of bear markets since World War II here.
Company Risk vs. Market Risk
One of the most important distinctions in investing is between company risk and market risk. An individual company—think Enron or Pan Am—can go to zero and never return. But a diversified portfolio of 500 of the world’s largest, most innovative, and best-financed companies? That has never happened.
Diversification may mean you’ll never make a killing, but it also means you won’t get killed. When you eliminate company risk through diversification, what you’re left with is market risk—what we call volatility.
The Real Risk is Behavioral
Volatility isn’t the enemy. Our reaction to it is. Investors often mistake a temporary market decline for a permanent loss and sell during downturns—locking in losses instead of staying the course.
The truth is, market declines are temporary, and market advances are permanent. The real risk isn’t the market—it’s the decisions we make in response to short-term movement.
Tariffs, Uncertainty, and Long-Term Vision
The recent tariff situation is a perfect example. Trade policy uncertainty disrupts business planning, which affects earnings and share prices. But we’ve been here before. Every crisis in our history has had its share of panic, confusion, and uncertainty. And every time, Americans have adapted, innovated, and come back stronger.
We don’t know how this round will play out—but history tells us we’ll figure it out. We always do.
A Plan Beats Panic
In times of volatility, the best strategy is to zoom out. Here’s how to invest with purpose:
- Set your most cherished lifetime goals on paper.
- Create a plan in the effort to achieve those goals.
- Build an investment portfolio that has a history of return with enough octane to achieve those goals and invest.
- Choose every day, not to mess with it because this might cause you to blow up your plan and fail.
That last step is often the hardest—and it’s where a competent, caring advisor can be worth far more than they charge. If the advice you receive helps you stay disciplined when emotions rise, it's invaluable.
Call to Action: Let’s Build a Plan You Can Stick With
Volatility is inevitable, but panic is optional. If market swings are keeping you up at night, let’s talk. At WealthPlan Advisors Group, we help clients build personalized plans rooted in history, not headlines—plans designed to weather the ups and downs and keep you on track toward your long-term goals.
Click here to schedule a conversation
Your future deserves a plan, not a reaction. Let’s build it—together.