The Market is Volatile. How Much Does That Really Matter?
Key Takeaways
Volatility is the price of growth. Short-term market fluctuations are normal and unavoidable—they’re the trade-off investors accept for stocks’ long-term return potential.
Your time horizon is what matters most. If you need your money soon, volatility is a real risk. If your goals are decades away, daily market swings matter far less.
Sequence of returns risk can hurt retirees the most. A market downturn early in retirement, combined with withdrawals, can do lasting damage to a portfolio.
Reacting emotionally to volatility can cost you. In 2024, the S&P 500 gained 25.1%, but the average equity investor earned just 16.5%—largely from poorly timed buying and selling.
A diversified, goal-aligned portfolio can be your best defense. Matching your investment mix to your time horizons—and staying the course—helps manage volatility without sacrificing growth.
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Why Volatility Exists—and Why It’s Normal
On any given day, the stock market can feel like a roller coaster. That can be unnerving—but it ultimately may not matter very much, as long as you have a diversified portfolio that’s appropriate for you.
Volatility—short-term fluctuations in an investment’s value—is a natural and unavoidable part of investing in stocks. In fact, it’s key to their growth potential: Investors demand the opportunity to earn strong returns if they’re going to take on stocks’ risks. The stock market’s ups and downs are simply the price investors have to pay for potential long-term growth.
That said, it’s one thing to understand that volatility is part of investing and another thing to live through it. Alarming headlines and doomsday commentary can make every dip feel like a crisis.
The key question: Does volatility make it harder to reach your goals? That depends mainly on your time horizon—when you will need to tap your investments.
Strategies to Reduce Short-Term Volatility Risk
A portfolio designed for your situation and goals can help manage that risk:
| Strategy | Why It Matters |
|---|---|
| Use more stable assets for short-term savings. | For near-term goals, holding savings in cash and cash equivalents can help protect against market swings. |
| Maintain a cash reserve in retirement. | If you keep at least a year’s worth of expenses in cash, you may be able to avoid selling investments during market declines. |
| Gear your retirement asset allocation to your mix of time horizons. | You’ll probably need some of your retirement assets to provide income during the early years, so some of your investments have a short time horizon. But you might live three decades or longer in retirement, which means some of your assets have a much longer time horizon. Your overall investment mix should reflect that combination—ideally with relatively stable investments for the first retired years and consider more growth-oriented (and more volatile) investments for the years farther in the future. |
| Consider guaranteed income sources. | Financial products such as annuities can provide a steady stream of guaranteed income so you can rely less on your investment portfolio to fund your post-career lifestyle. |
When Volatility Can Present a Big Risk: You Need Your Money Soon
You may need to fund some goals in the next few years—for example, to buy a house, to pay for college, or to pay the bills in your first years of retirement. If you invest that near-term money in stocks, you run the risk that a sudden market downturn could leave you short of funds.
Sequence of returns risk—the danger that a market downturn will happen just before or early in retirement—can do permanent damage to retirement savings, because the combination of losses and withdrawals can leave new retirees with less to invest for the future.
When Volatility Is Less of a Risk: Your Financial Needs Are Farther in the Future
If you’re saving for goals that are decades away, day-to-day market moves can be less of a concern.
The Historical Case for Patience
Historically, the longer the time period you consider, the more likely stocks have been to advance.
For example, the S&P 500 has posted gains over every 20-year period since 1928.1 That long-term steadiness has come despite frequent short-term disruptions. Since 1980 alone, the S&P 500 fell 5% or more in 93% of calendar years and 10% or more in 48% of calendar years.2 Such drops are par for the course, not necessarily signs of a crisis.
Don’t Forget About Inflation Risk
While a longer time horizon decreases the risk of volatility, it increases a different kind of risk: inflation. You need your investments to grow faster than inflation to preserve your buying power—and the longer the time period, the more growth you’ll need.
Example: If you have $100,000 in annual expenses now, you will need about $180,000 twenty years from now (assuming 3% annual inflation). Pursuing that growth generally requires investing in stocks—and that means riding out periods of volatility.
Strategies for Long-Term Investors
Maintain a dedicated allocation to stocks. Selling after declines just increases the chance that you’ll lock in losses and miss a potential rebound, which can seriously compromise your long-term results.
Case in point: In 2024, the S&P 500 gained 25.1%, but the average equity investor earned just 16.5%, largely because they jumped in and out of the market at the wrong times. Many of the biggest withdrawals happened right before the market surged.3
Diversify. A diversified stock portfolio typically includes shares of companies of different sizes, across all economic sectors, in the U.S. and in international markets. Each type of stock may perform differently during a given period, potentially helping smooth the effects of volatility.
How to Manage Your Response to Market Volatility
If you’re investing for the long term, how you respond to volatility may matter more than the volatility itself. If you find that market swings are making you nervous, ask yourself:
Why am I investing? What am I trying to achieve?
How much do the short-term changes in my account balance affect my ability to reach those goals?
Quick Tips to Stay Grounded
Take a day or two before making any big changes
Limit your exposure to media noise and market headlines
Remind yourself that any news you know is likely already reflected in stock prices
The bottom line: The best course of action is to talk to a financial professional. They can help reorient your thinking around your goals, so you can focus on what matters most: the life your investments are helping you build.
1 NYU Stern School of Business, “Historical Returns on Stocks, Bonds and Bills: 1928-2024.” https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
2 Fidelity, “A game plan for market corrections,” 2026.
3 Dalbar, “Investors Missed the Best of 2024’s Market Gains, Latest DALBAR Investor Behavior Report Finds,” 2025. https://www.prnewswire.com/news-releases/investors-missed-the-best-of-2024s-market-gains-latest-dalbar-investor-behavior-report-finds-302416023.html