Patience is golden: why you should remain invested during market turbulence

Key takeaways

• Bad timing has a cost - Missing just a handful of the market's best days can cut long-term returns substantially.
• Diversification provides reassurance - A diversified multi-asset portfolio smooths the volatility experience, reducing the temptation to make panic-driven decisions.
• Patience is rewarded - Historical crises demonstrate that markets have consistently recovered from severe downturns, rewarding investors who showed patience.

Market downturns can be unsettling, particularly for those with substantial wealth at stake. When portfolios decline, the instinct to act can feel overwhelming. Yet evidence consistently shows that attempting to sidestep volatility by moving to cash often does more harm than good. For high-net-worth individuals (HNWIs) with long investment horizons, staying invested through market turbulence has historically proven to be a more effective strategy than trying to time entry and exit points.

The main challenge lies in the emotional response that volatility triggers. Watching significant sums disappear from a portfolio, even temporarily, tests the resolve of even the most experienced investors. This discomfort leads many to sell during downturns, intending to reinvest once conditions improve. The difficulty is that identifying the right moment to re-enter the market is exceptionally hard, and the cost of getting that timing wrong can be substantial.

Understanding why markets reward patience rather than market timing requires looking at how returns are distributed over time. The best days in the market often occur close to the worst days, and missing even a handful of the strongest performance days can significantly erode long-term returns. This clustering of gains during periods of volatility makes attempting to dodge downturns a particularly risky strategy.

The cost of missing the best days

Research into market behaviour reveals a striking pattern. A substantial proportion of long-term equity returns are concentrated in a relatively small number of trading days. Missing just the ten best days over a multi-decade period can reduce total returns by half or more compared to remaining fully invested throughout. The problem for market timers is that these exceptional days are nearly impossible to predict and frequently occur during periods of heightened volatility when investor sentiment is most negative.

An investor who moved to cash to avoid further losses would need to correctly judge not only when to sell but also when to buy back in. Getting either decision wrong results in either experiencing the full downturn anyway or missing the subsequent recovery. Data suggests that most investors who attempt this manoeuvre end up selling after markets have already fallen substantially and buying back after much of the recovery has occurred, effectively locking in losses and missing gains.

Diversification reduces temptation

A well-constructed multi-asset portfolio can make it considerably easier to stay invested during turbulent periods. By spreading capital across different asset classes, geographies and investment styles, diversification helps to smooth the overall experience of volatility. When equities are falling sharply, high-quality bonds often provide stability or even gains. When one region underperforms, another may hold up better. This balance means that while the portfolio will still experience declines during major market stress, the magnitude is typically less severe than it would be in a concentrated equity-only portfolio.

This more moderate experience of volatility serves a crucial psychological function. Investors facing a 15% portfolio decline are more likely to maintain their discipline than those watching a 30% fall. Diversification does not eliminate volatility, but it can reduce it to levels that are more emotionally manageable, decreasing the likelihood of panic-driven decisions. The result is that properly diversified investors are better positioned to remain invested through difficult periods and capture the eventual recovery.

Learning from past shocks

The value of staying invested becomes clear when examining how markets have responded to previous crises. The 2008 financial crisis saw falling global equity markets trigger widespread fear about the stability of the entire financial system. Yet investors who remained in the market through that period saw their portfolios recover and go on to reach new highs within a few years.

The COVID-19 pandemic in 2020 produced one of the fastest market declines in history. The speed and severity of the drop led many to predict a prolonged downturn. Instead, markets recovered remarkably quickly, reaching new highs by the end of the year. Investors who sold during the panic and waited for greater clarity before reinvesting missed much of that dramatic recovery.

More recently, 2022 brought a challenging environment where both equities and bonds fell simultaneously as central banks raised interest rates aggressively to combat inflation. This unusual scenario, where traditional diversification provided less protection than usual, tested investor resolve. Those who stayed invested were positioned to benefit as markets stabilised and recovered through 2023 and beyond.

Each of these episodes reinforced the same lesson. Market downturns feel permanent while they are happening, but historically they have proven temporary. The investors who preserved their wealth most effectively were not those who successfully predicted and avoided every downturn, but rather those who maintained their investment discipline regardless of short-term turbulence.

At W1M, we pride ourselves on helping our clients take a long-term view of their wealth so that it can stay secure and grow for future generations. If you would like to speak to one of our experienced advisers, you can contact us here.

Glossary

Volatility: The degree of variation in the price of an investment over time.

Multi-asset portfolio: An investment portfolio that holds a mix of different asset classes.

Market timing: The strategy of attempting to predict future market movements in order to buy low and sell high.

Diversification: The practice of spreading investments across different assets, sectors and regions to reduce the impact of any single investment performing poorly.

Asset class: A category of investments with similar characteristics and market behaviour, such as equities, fixed income securities or real estate.