Volatility is the price of admission for long-term returns. Here's why the worst thing you can do during a downturn is sell.
It happens roughly once a decade, and it always feels different. The market drops 20%, then 30%. Pundits declare the death of every asset class. Friends ask if you're "still in." The instinct — almost universal — is to do something. Pull the money out. Move to cash. Wait for things to settle down.
It's the wrong instinct. And the data on this is overwhelming.
Here's a sobering statistic. Over the past 30 years, if you had simply held a globally diversified portfolio through every crash, recession, and panic — and stayed invested — your annualised return would have been roughly 8-9% per year.
If you had missed just the 10 best days in the market over those 30 years, your return would have been cut roughly in half. Miss the best 30 days, and your real return becomes near-zero.
Now here's the kicker: the best days almost always cluster right after the worst days. The 10 single-best market days in the past 30 years overwhelmingly happened within two weeks of the 10 single-worst days. The investors who sell during the crash are precisely the ones who miss the recovery — and miss the recovery, and you miss the returns.
A market drop doesn't change the underlying value of the companies you own. If you own a globally diversified ETF, you own thousands of real businesses producing real goods and services for billions of customers worldwide. A 30% market drop doesn't mean those businesses are 30% less productive — it means investors are temporarily willing to pay 30% less for the same future earnings stream.
Eventually — and "eventually" is usually 1 to 3 years, not decades — pricing reattaches to fundamentals, and the market recovers. Sometimes the recovery is fast (2020 took 6 months). Sometimes slow (2008 took several years). But over any 15-20 year window in the past century, broad equity markets have always recovered to new highs.
1. Keep contributing. If you're dollar-cost averaging, your fixed monthly contribution is now buying more units at lower prices. These are the contributions that, in retrospect, will look like geniuses moves. Don't pause them.
2. Rebalance. If equities have dropped 30% and bonds have held steady, your overall allocation has drifted away from your target. Rebalancing — selling some bonds, buying more equities — is a mechanical form of "buy low, sell high." At Smartly, this happens automatically.
3. Stop checking your portfolio. Genuinely. The single best thing you can do for your long-term returns during a downturn is to look at your portfolio less. Every time you check and it's lower, your brain registers a small loss — and accumulated losses make you more likely to panic-sell. Set a quarterly check-in. Otherwise, ignore it.
To be balanced: there are situations where selling during a downturn is appropriate. None of them have to do with the market's recent performance.
If your life circumstances have changed and you need the money for non-investment purposes within 1-2 years — that's a legitimate reason to liquidate. If you've discovered your risk profile was set wrong from the start, and you've been losing sleep — that's a reason to permanently shift to a more conservative allocation (not bounce in and out).
What's never a good reason: "The headlines are scary," "people on Twitter are saying it'll get worse," "I just want to wait for things to settle." Those are emotional reactions to volatility — and acting on them costs investors more than every other mistake combined.
Long-term returns exist precisely because markets are volatile. If equities returned a smooth 8% every year with no swings, everyone would invest in them, prices would rise until expected returns dropped to match safer assets, and the equity risk premium would disappear. The fact that markets drop scarily sometimes is exactly what makes them pay more over the long run.
Volatility isn't a bug. It's the feature that makes the returns possible. Your only job, during a downturn, is to remember that and stay put.
Continue reading:
Open a Smartly account and put what you've read into practice — in 5 minutes, from S$50.