Why volatility is no excuse to sell stocks

The value of not over-reacting to geopolitical turmoil has been highlighted after analysis of historical stock market data showed the importance of staying invested.

While investors should remember that past performance is no guarantee of future results, the records indicate that volatility is not a good reason to exit the stock market.

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The separate research published this week by UBS Global Wealth Management and Schroders follows a 75% year-to-date jump for the Vix fear index to more than 25. The real-time indicator of market sentiment ended last week at 29 after the Iran war drove oil prices higher and stoked global worries about stagflation.

However, UBS points out that since 1990 the S&P 500 index has delivered an average 12-month return of 11.5% following episodes when the Vix rose to between 27.5 and 30. It produced an even higher return of 22.1% after the Vix reached 35-40.

Both figures compare favourably to the 12-month forward return of 10% in all other periods.

UBS said that a $100 investment in the S&P 500 index in September 1989 would have grown to $3,617 by the end of January 2026 through a simple buy-and-hold approach.

However, missing just the best week would have reduced the return to $3,249. Missing the best quarter would have resulted in $2,863 - over 20% less than for those who stayed put.

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The bank notes that stock markets have historically experienced more positive years than negative ones. Since 1960, the S&P 500 has posted gains in 72% of calendar years, with returns between 10% and 30% nearly half the time.

In addition, the index has delivered returns above 20% in 18 years but has lost more than 20% in only three years.

This means that the odds are more favourable for investors with longer time horizons - the S&P 500 has not recorded a negative return over any 20-year period since 1926.

Statistical analysis of asset class performance also reveals that no single asset consistently outperforms across all market cycles, and that a 60:40 equity-bond portfolio has historically been able to reduce risk during market downturns.

UBS said: “It is natural for investors to feel unsettled or to consider retreating to the sidelines until the outlook becomes clearer.

“But periods of uncertainty and market stress are not new, and historical data demonstrate that investors with a longer-term horizon are best served by staying invested with a diversified portfolio.”

Schroders said that shifting money out of stocks and into cash or “safe-haven” assets such as short-term government bonds may seem like the most prudent response.

However, history since 1990 indicates that this isn’t generally the best approach. It points out that over the shortest horizon of one month, stocks match cash’s frequency of delivering inflation-beating returns at 60% of the time.

However, that changed once Schroders looked at periods of 12 months or more. At three years, stocks deliver returns above inflation three out of four times versus around half the time for cash. At 10 years, it is 87% of the time versus 54% for cash.

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Duncan Lamont, head of strategic research, said there were three main reasons why trying to time the market can be an expensive mistake.

The first is that market disruptions after major geopolitical events have historically been short-lived, and markets have quickly recovered as the alarming headlines fade.

Recoveries can also come in abrupt bursts, meaning that investors risk returning to the market after the biggest uptick has occurred.

Third, selling equities amid turmoil can mean investors merely capture losses in a short-term downturn.

Volatility is inevitable and occurs more often than investors realise. In fact, Schroders points out that the past 54 calendar years have seen equities as measured in dollar-based terms by the MSCI World Index experience a 10% or more decline in 31 of those years.

There’s been a 20% or more decline at some point during the year in 13 of those years.

Even though markets can experience major downturns over the course of a year, in the past the average gains made during the year have more than offset the losses. Stocks, on average each year, have fallen by 15% and risen by 23%.

Lamont said: “Panic has a pejorative sense for good reason. It suggests an impulsive reaction that can have unintended negative consequences. For equity markets, history certainly shows the value of not panicking amid market turmoil.”