Market volatility is an inevitable aspect of investing, yet many investors struggle with anxiety when experiencing market downturns. In our latest episode of Better Financial Health, we explored an essential question: Should you worry when the market dips, or should you just chill? The answer, supported by historical data and behavioral finance principles, leans heavily toward maintaining composure during market fluctuations.
Market corrections—defined as a 10% drawdown—occur approximately every one and a half years. This statistical regularity often surprises investors who perceive each correction as an unusual or catastrophic event. More severe downturns, termed “bear markets,” involve declines of 20% or more. While these events can certainly feel emotionally distressing, understanding their frequency and historical context provides valuable perspective. Historical analysis reveals that only about two out of every ten years end with negative market performance, despite the regular occurrence of these intra-year corrections. The majority of years conclude with positive performance, even after experiencing temporary declines along the way.
The S&P 500 has averaged approximately 10% annual returns since the Great Depression—an impressive long-term trend that has persisted through world wars, economic crises, pandemics, and political upheavals. Interestingly, the market rarely returns exactly 10% in any given year. Instead, annual performance fluctuates significantly: some years delivering 30% gains, others experiencing 20% losses, and many falling somewhere in between. This variability is precisely why long-term investing requires patience and emotional discipline. Investors often fall into the behavioral trap of projecting recent performance into the future—expecting continued gains during bullish periods or continued losses during bearish ones—when market history consistently demonstrates cyclical patterns.
The COVID-19 market experience provides a compelling case study of why patience matters. From January to mid-February 2020, markets were up 4.81%—then came the pandemic-induced crash, sending markets plummeting 34% by late March. Many investors panicked, wanting to sell everything at the bottom. However, those who remained invested and stuck to their plan were rewarded by year-end, as the S&P 500 finished 2020 up 18%. This dramatic reversal exemplifies why reactionary investment decisions based on temporary market conditions often lead to poor outcomes. The psychological tendency to anchor to our account’s highest value amplifies the pain of losses, which is why checking investment accounts daily can be counterproductive, even during positive market periods.
For investors experiencing anxiety during market downturns, self-assessment is crucial. Ask yourself: Has your time horizon changed? Has your risk tolerance fundamentally shifted? Do you need the invested money within the next three to five years? If the answer to these questions is “no,” then often the best course of action is to maintain your existing investment strategy. This doesn’t mean blindly ignoring market conditions, but rather recognizing that short-term volatility is the price paid for long-term growth. As we like to say, “The market is not a mood ring”—it doesn’t reflect our daily emotions, and successful investing requires looking beyond temporary fluctuations toward long-term financial goals.
