How to Invest During Periods of Market Volatility

Market volatility is one of the most predictable features of investing. Equity markets have always experienced periods of sharp decline followed by recovery. They always will. What changes is the response of individual investors — and the evidence suggests that most respond in ways that materially harm their long-run returns.

This guide explains how volatility is measured, why the human response to it tends to be counterproductive, the specific disciplines that help investors navigate volatile markets successfully, and how to use volatility as an opportunity rather than a threat.

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Measuring volatility: the VIX and its relatives

The VIX (CBOE Volatility Index) is the market's real-time estimate of how much the S&P 500 will move over the next 30 days, expressed as an annualised percentage. It is derived from the prices of S&P 500 options — specifically, the premium investors are paying to insure against (or bet on) near-term market moves. A VIX of 15 means the options market implies the S&P 500 will move approximately 4.3% per month (15 divided by √12).

The VIX has earned its nickname — the "fear gauge" — because it tends to spike sharply when markets fall:

• Normal range: 10–20 (low fear, complacency)
• Elevated: 20–30 (heightened uncertainty)
• High stress: 30–40 (significant market fear)
• Crisis: 40+ (panic)

Historic VIX peaks:

• October 2008 (Global Financial Crisis): VIX reached 89.5 — unprecedented at the time
• March 2020 (COVID-19 market crash): VIX reached approximately 85 — the fastest-ever equity market decline
• August 2024 (Japan carry trade unwind): Brief spike to approximately 65
• 2022 Ukraine/inflation period: VIX remained persistently elevated in the 25–35 range

The VFTSE is the UK equivalent of the VIX, derived from FTSE 100 options. It tracks closely with the VIX but reflects UK-specific concerns.

An important property of volatility: it clusters. High volatility days tend to be followed by more high-volatility days; calm periods persist. This is the basis of the GARCH (Generalised Autoregressive Conditional Heteroskedasticity) family of statistical models, which capture the time-varying nature of market volatility. The practical implication: when volatility spikes, it rarely returns to normal in days. Investors should expect an extended period of elevated uncertainty after an initial shock.

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Market corrections: normal, predictable, and always temporary

The word "correction" refers to a market decline of 10–20% from a recent high. A "bear market" is typically defined as a decline of 20% or more. These events feel catastrophic when they are happening. The data shows they are entirely normal and always temporary (in developed market equities with diversified holdings).

Since 1970, the FTSE All-Share has experienced:

• Corrections of 10%+: approximately every 1–2 years
• Bear markets of 20%+: approximately every 3–5 years
• Severe bear markets of 40%+: 3–4 times (1973–74, 2000–03, 2007–09, 2020)

Every one of these declines has been fully recovered. The FTSE All-Share (total return, including dividends reinvested) has delivered approximately 10–11% per year over the 50 years to 2025, through all of these episodes.

The investor who stayed fully invested through all of these periods captured all of those returns. The investor who sold during declines — even if they bought back later — faced a much harder problem: timing the re-entry. The evidence from behavioural finance research is clear: investors who sell during market downturns systematically buy back too late, after much of the recovery has already occurred. The net result: they crystallise real losses and miss much of the recovery.

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The psychological challenge: why investors sell at the bottom

The human brain did not evolve to invest in financial markets. It evolved to respond to threats with immediate protective action — to run from the predator, not to sit calmly as the portfolio falls 30%.

Key psychological biases that emerge in volatile markets:

Loss aversion: Losses are experienced approximately twice as painfully as equivalent gains are pleasurable (Kahneman and Tversky, 1979). A 30% portfolio decline feels viscerally terrible — much worse than the equivalent 30% gain felt good. This asymmetric pain drives investors to act: to sell, to "stop the bleeding," to feel in control.

Recency bias: The most recent events dominate our judgement of what is likely in future. After a sharp market fall, investors project continued declines. After a long bull market, they project continued gains. Both are systematically wrong — markets mean-revert. The worst time to be pessimistic about equities is after a 30–40% decline.

Availability bias: A vivid, emotionally charged event (the 2008 crash) remains cognitively available and influences decisions long after it is statistically irrelevant. Investors who lived through 2008 remained more cautious of equities for years afterwards, missing much of the 2009–2020 bull market.

Herding: When other investors (media commentary, conversations with colleagues and friends) are unanimously pessimistic, the social pressure to agree — and to act on that agreement — is powerful. The periods of maximum market pessimism and maximum volatility are typically the periods of maximum buying opportunity.

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Five rules for volatile markets

Rule 1: Do not check your portfolio daily. This sounds almost trivially simple. But the evidence is clear: more frequent portfolio monitoring leads to more trading, which leads to worse returns. An investor who checks their portfolio weekly trades approximately 10 times more than one who checks monthly. The volatility they observe on a daily basis is largely noise — it contains no information about the long-run value of their investments.

Rule 2: Do not sell into weakness unless your investment thesis has fundamentally changed. Selling because prices have fallen is not a strategy — it is a behavioural reaction. The question to ask is: "Has the long-run investment case for this asset changed?" If a global equity ETF tracking 1,500+ companies has fallen 25%, what has changed about the long-run earnings power of those companies? Usually: very little. If the answer is "nothing fundamental has changed," selling is almost certainly wrong.

Rule 3: Rebalance into the volatility. Disciplined portfolio rebalancing — selling asset classes that have risen above target weight and buying those that have fallen below — is the systematic equivalent of buying low and selling high. If equities fall 25% and gilts rise 10%, a balanced portfolio will be underweight equities and overweight gilts relative to target. Rebalancing means buying equities (fallen) with gilt proceeds — exactly the right behaviour, but psychologically very difficult.

Rule 4: In accumulation, increase contributions during declines. If you are saving regularly into an investment portfolio, a market decline is unambiguously good for you. You are buying more units at lower prices. Investors who maintained or increased contributions during 2020's COVID crash, and during 2022's bear market, benefited enormously from the recoveries that followed.

Rule 5: In drawdown, use your cash buffer. A retiree drawing income from a portfolio during a market crash faces sequence-of-returns risk — selling investments at depressed prices to fund spending. The solution: maintain a cash buffer (12–24 months of spending needs) that can fund withdrawals during a bear market without forcing equity sales. When markets recover, replenish the cash buffer from the equity portfolio.

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Volatility as an opportunity

The most consistent finding in behavioural finance is that markets undershoot in a crisis: they fall further, and faster, than long-run fundamentals justify. The cause is forced selling — investors who must sell for reasons unrelated to fundamentals (margin calls, liquidity needs, redemption pressure) depress prices below intrinsic value.

This creates genuine buying opportunities for investors who:

• Have sufficient liquidity (do not need to sell)
• Have the emotional discipline to act against the prevailing mood
• Have a prepared list of what to buy

The concept of a "shopping list" — a pre-prepared list of assets, funds, or positions you want to add to your portfolio, at prices you have calculated represent good value — is one of the few genuinely reliable investment edges for retail investors. When the market panics and drives prices to those levels, you act on your pre-prepared plan rather than making decisions under emotional pressure.

The October 2022 environment (UK gilts yielding 5%+, equity valuations compressed, credit spreads wide) was, in hindsight, an exceptional entry point for long-term investors. The investors who had prepared for it — and acted — benefited substantially over the subsequent 18 months.

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The value of investments and the income from them can fall as well as rise. Past market recoveries do not guarantee future recoveries. Investors in individual stocks, concentrated positions, or specific sectors face risks that diversified portfolios do not. All investments carry the risk of loss. This guide is for information only and does not constitute financial advice. Tax treatment depends on individual circumstances.

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How Global Investments can help

Global Investments designs portfolios specifically to help clients navigate market volatility without abandoning long-term strategy. This includes stress-tested asset allocation, cash buffer planning for drawdown clients, pre-agreed rebalancing triggers, and the ongoing behavioural coaching that helps clients stay invested when every instinct says otherwise. We have guided clients through multiple market crises over 32 years.

Contact us at globalinvestments.net to discuss how we can strengthen the resilience of your portfolio.