The Risk of Walking Away: Lessons from Stock Market Volatility

The stock market can oftentimes feel like a rollercoaster ride, soaring to new heights before plunging down in a frantic descent. As many investors have learned, the most significant gains and losses in the market often occur in close proximity, making it vital to maintain an investment strategy even during turbulent times. Recent events have underscored this reality, highlighting the potential long-term impacts on those who choose to step back during periods of uncertainty.

Market Volatility Defined

The recent fluctuations in the stock market, particularly in response to policy announcements concerning tariffs from the White House, serve as a case study in volatility. For instance, the S&P 500 experienced a sharp decline of approximately 6% following the announcement of sweeping new tariffs on April 2, 2025. However, just days later, on April 9, the market rebounded with a dramatic increase of 9.5%. Such swings are not uncommon and underscore a critical theme in investing: the best and worst days can indeed be found side by side.

Understanding the Risks of Market Timing

Investment strategies that involve pulling out of the market during downturns can lead to significant missed opportunities. As noted by wealth management experts at Wells Fargo Investment Institute, the sharpest drops are often closely followed by some of the best days in the market. They have identified a consistent pattern whereby the largest percentage gains and losses typically occur within a narrow time frame.

“Disentangling the best and worst days can be quite difficult… since they have often occurred in a very tight time frame, sometimes even on consecutive trading days,” stated Wells Fargo strategists in a recent note. Their findings advocate for maintaining equity investments even during heightened volatility.

The Consequences of Missing Market Gains

According to Alex Michalka, head of investment strategy at Wealthfront, remaining on the sidelines in anticipation of a market downturn carries its own set of risks. “If investors are sitting on uninvested cash to avoid volatility, it’s important to remember that this behavior carries a risk that the market will go up while you’re waiting on the sidelines,” Michalka explained. To illustrate his point, had investors sold off on April 3, they would have entirely missed the significant rebound just days later.

Further emphasizing the importance of timing, Adam Turnquist, chief technical strategist at LPL Financial, conducted an analysis of the S&P 500’s performance from 1990 to 2024. His findings revealed that missing just one of the market’s best days could reduce an investor’s average annualized return from an impressive 9.8% to 6.1%. Missing the two best days can drop returns further to 3%, and missing five of those days could even plunge annualized returns into the negative.

The Difficulty of Perfect Timing

While timing one’s investments perfectly—selling before downturns and buying ahead of recoveries—appears to be an attractive strategy, it is notoriously difficult to achieve in practice. It’s worth noting that studies have shown that even an investor who possesses an extraordinary ability to time the market may not see substantial benefits in terms of returns compared to those who adopt a dollar-cost averaging strategy.

Research by RBC Global Asset Management indicates that an individual who systematically invested over a 20-year period would see returns comparable to someone who perfectly timed the market. The difference, though present, was marginal and did not justify the risks associated with buying and selling at precise moments.

Staying the Course in Uncertain Times

The historical performance of the stock market indicates that long-term investors are generally better off sticking to their investment plans, especially during periods of instability. The advice to “Don’t panic” may come off as cliché, but it is a reminder of the prudent investment strategies that successful investors have followed throughout the years.

In conclusion, as the stock market ebbs and swells, the lesson remains clear: walking away can lead to significant missed opportunities. For those willing to ride out the volatility, the potential returns may far outweigh the risks of market timing. Investing consistently and staying informed about market dynamics may well serve as the best course of action for both novice and experienced investors alike.