When the stock market goes up and down very fast, it feels scary. When you see your money drop 15% in just a few weeks, it makes you want to do something to stop it. But if you want to save for many years, following that feeling is usually a very expensive mistake.
What Volatility Really Is
Volatility means how fast and how much the price of things goes up and down. People check this using the VIX index. Many call it the “fear gauge” because it shows if people are scared about the S&P 500 stock market.
If the VIX is more than 20, it usually means the market is very nervous. When COVID-19 happened in March 2020, the VIX went to 82.69. This was the highest number since the big crisis in 2008. The market fell down 34% in only 33 days, but then it came back completely in five months.
The people who got scared and sold their stocks missed that fast recovery.
The Real Cost of Reacting
This is where people who want to save money for a long time get hurt. The problem is not the price moving, but what people do when they get scared.
A study in 2022 from Dalbar showed that the average investor only made 4.79% money every year for 20 years. But the S&P 500 market made 9.51%. That is almost 5% lost every year!
This happens because people have bad timing. They sell their stocks when the price is low and buy them back only after the price is high again. This is a very expensive mistake.
If you miss only the 10 best days in the market over 20 years, you can lose almost half of your total money.
Why Long-Term Investors Have the Advantage
Time is the best tool you have. If you look at history, it always shows the same thing:
- The S&P 500 never lost money if you kept your investment for any 20-year period.
- Every big crash, like 1987, 2001, 2008, and 2020, always finished with the market going back up to new high prices.
- People who kept their stocks during the 2008 crash and stayed for 10 years made much more money later.
- The risk of not being in the market when it goes up is just as bad as being in the market when it goes down.
How Volatility Can Work in Your Favor
If you put money every month into a 401(k) or your bank, when the market goes down, it is a good chance for you. This is called dollar-cost averaging. It means you put the same amount of money at the same time, even if the market is bad.
When prices are low, your money buys more shares. When the prices go back up, those shares become worth much more. If the market goes down when you are 30 years old, it can actually help you make more money for the future, but only if you do not stop.
Beware Of The Emotional Side
Research from Vanguard says that behavioral coaching, which just means helping people not to quit, adds about 1.5% more money every year. It is because they help people not to make choices based on fear.
You must build a portfolio that fits how much risk you can really take, not what you hope you can take. This makes it possible for you to stay when things feel bad.
For long-term investors, the moving price is not the enemy, but their panic is. The market always gives rewards to people who have patience.
