Market Volatility: Why Smart Investors Stay the Course
When markets drop 4-5% over several consecutive days, even experienced investors feel the tension. The instinct to protect your wealth can be powerful, but data shows this instinct often leads to poorer outcomes.
The most important thing an investor can do is remain invested through bouts of market volatility. Selling into market weakness has historically proven to be a poor way to build wealth, especially since most investors mistime their re-entry into the markets. The data is pretty stark: when you miss just 10% of the market's best days, you wipe out almost all the benefits of being invested. Even more stark, missing only the best 10 days in the past 20 years is enough to cut your returns in half.
The Hidden Cost of Market Timing
What many high-net-worth investors miss is the unpredictable nature of market rebounds. Historical analysis reveals that the market's best-performing days typically occur almost immediately after its worst days.
I've observed this phenomenon throughout my career: the forces that work to drive markets down very quickly can flip on a dime and shoot markets back up. Think of this as almost a “coiled spring” effect that can reward investors who remained invested through the bad days. We have already seen this phenomenon this year, and it’s a pattern that we’ve seen consistently across market cycles for over a century..
Segmenting Your Capital for Strategic Advantage
Wealthy families who navigate volatility successfully typically segment their capital into buckets based on a strong financial plan:
Short-term funds (0-3 years): Capital needed for planned expenses like education payments, home purchases, or tax obligations. This portion stays in conservative investments, ensuring access to funds that are less likely to be impacted by adverse market conditions.
Medium-term funds (3-7 years): Capital needed for potential future expenses, deployed with a growth orientation today that shifts more conservative as those planned spending becomes concrete.
Long-term funds (10+ years): The wealth-building segment that stays fully invested through market cycles, which creates the best opportunity to recognize long-term returns. Since other funds are dedicated to short-term needs, this capital is always working in the market, and families feel comfortable leaving these funds fully invested regardless of market fluctuations.
When Fear Creates Opportunity
Market pullbacks present distinctive opportunities for those with available capital. It's an old adage—be greedy when others are fearful. Time has proven again and again that market pullbacks offer some of the best opportunities to build long-term wealth.
What separates sophisticated investors from the crowd is their ability to view volatility not as a threat but as a mechanism that periodically creates discounted entry points.
The Psychology Behind Successful Long-Term Investing
The most common wealth-building mistake occurs when investors conflate short-term market movements with long-term investment outcomes. Successful investors understand that:
- Market volatility is a feature, not a bug, of the wealth-building process
- Investment plans should incorporate multiple scenarios, including the possibility of negative returns for several consecutive years
- Wealth is created through remaining invested through complete market cycles
At Range, we build volatility into our assumptions. We've built in the chance you might have one, two, three, four, five years of negative returns and work with you to create a retirement plan that still works.
Taking Action During Market Turbulence
Rather than reactively selling during downturns, consider these strategic approaches:
- Review your investment and retirement plans to confirm short-term needs remain protected
- Maintain discipline with your long-term invested capital
- Explore opportunities to deploy additional capital at discounted prices
- Consult with wealth advisors who can provide objective perspective during emotional market periods
The most successful investors understand that market volatility simply creates the conditions for future returns. By maintaining your strategic allocation and viewing market cycles through a historical lens, you position your capital to capture the full benefit of long-term market growth.
Vasilios Rajendra, CFA, CFP®, is a Senior Investment Analyst at Range. Want to learn more about navigating market volatility with sophisticated investment strategies? Visit range.com/learn to explore our investment philosophy or book a demo with our wealth management team.
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