Why market volatility is the price of admission (even if it feels scary sometimes)

Have you ever invested your money, watched your portfolio balance decline, and then just felt like an absolute muppet? Maybe you looked back to your most recent high, and said to yourself, "I should have got out then!"

Or perhaps you've been working up the courage to make your first ever investment, waiting for your moment, watching your friends make gains, and then bam! The Strait of Hormuz closes. Interest rates rise. Someone you know gets made redundant. Or all three things happen at once. And it suddenly feels like your money is safer in your bank account than dipping a toe into the stock market.

Here's the thing about market volatility, though. People have been freaking out about it — and writing about it — since at least 1888. Let's look at how investor Jon Hume described 'the ordinary investor' back then.

It turns out getting FOMO, buying high and then panic selling is a tale as old as time.

So when even our grandparents' grandparents have sat through market turmoil, what can we learn?

What is market volatility?

Think of the sea. Sometimes you can float atop the waves without getting your hair wet. Other times you get dunked by an errant wave.

Market volatility is much the same. It's a measure of how much the price of an asset or index is moving. In low volatility, prices are relatively stable. In high volatility, they jump around more dramatically.

What's the VIX?

You can think of the VIX — full name CBOE Volatility Index — as being like a surf report. It's a measure of the expected volatility of the S&P 500 for the following 30 days, based on real time options prices. It's commonly known as the 'Fear Index' — the higher the VIX, the higher the expected volatility.

What about corrections and bear markets?

If prices fall more than 10% from their most recent high, investors call it a correction. If prices fall more than 20%, investors call it a bear market. These are normal, though uncomfortable, parts of investing.

Has this happened before?

Corrections and bear markets are normal even though they feel like the last thing from it.

Check out this chart of the Dow Jones Industrial Average. Past performance isn't an indicator or guarantee of future performance. But it shows that sticking out through the tough times generally pays off, depending on what you're invested in.

Source: Marketindex.com.au. Past performance is not an indication of future results.

What causes market volatility?

In general, market volatility has three causes.

1. 1 Uncertainty. The market famously hates uncertainty, and volatile markets are uncertain markets. In 2020, people didn't know how long the pandemic would last, and what the long-term impact on industries would be. As investors found certainty, markets recovered.
2. 2 Inflation and interest rates. When inflation rises, central banks raise rates to get spending under control. Higher rates increase the price of borrowing, impacting what investors are willing to pay for shares today. This is why you sometimes see so much speculation around what central banks will do, and such a big market reaction when the Reserve Bank of Australia or the Federal Reserve makes a decision.
3. 3 External shocks. This is where pandemics, wars, and paradigm shifting economic events tend to come in.

What does your brain do during a market downturn?

Markets hate uncertainty, and so does the human brain.

You're only human, which is why you can freak out even if you know that history's on your side.

This is because losses feel twice as bad as gains feel good, and loss aversion makes us act irrationally. Daniel Kahneman and Amos Tversky figured this out in 1979 when they started to look into behavioural economics.

The thing is — by panic selling and trying to avoid loss, it's common for investors to miss out on the gains, too. JP Morgan hammers this home in their Guide to Retirement where they highlight that leaving $10,000 in the S&P 500 between 2 January 2006 and 31 December 2025 would've resulted in 11% annual growth to $80,619; but missing just the 10 best days would have cut that return to 6.6% p.a. and $35,866.

Even that theoretical loss makes you wince, right?

Of course, returns are never guaranteed and just because this happened in the past doesn't mean it will again.

How volatility fits into some investing strategies

Market volatility means prices move, sometimes dramatically. For some long-term investors, that movement is built into their approach from the start.

Dollar-cost averaging is one example: investing a fixed amount at regular intervals regardless of market conditions. So when the price is lower, you can buy more, and when it's higher, you buy less. It's like how your super works. It gets paid each time you do, regardless of market conditions.

Whether an approach like this suits you depends on your circumstances, timeframe, and risk tolerance. Like any strategy, it has trade-offs. You can find out more about dollar-cost averaging at Spaceship Learn, and if you're interested, find out about how to dollar-cost average with a Spaceship investment plan.

So… should you invest when the market is down?

Every downturn in history has had people investing through it. There was a buyer for every person who sold during the GFC and the COVID crash — that's how the stock market works.

While past performance is no guarantee of future results, markets have historically recovered from downturns, and patient investors have generally been rewarded for staying the course.

That said, we're never going to tell you what you should do with your money. We're big believers that investing can help you grow your wealth and live the life you want to live — it's why Spaceship exists. The thing is, the market can turn at any time. It could get worse; it could get better. Generally, it eventually gets better, but we're not going to pretend that the interim isn't painful sometimes.

This is why we advocate for doing your research, and checking out the TMD and PDS of anything you invest in to make sure it aligns to your financial needs. There are investment products that suit lower risk appetites, higher risk appetites, shorter timeframes and longer timeframes, including in our Spaceship Voyager portfolios. It's about figuring out what works for you and arming yourself with the knowledge to become a successful investor.

What should you actually do during market volatility?

1. 1

   Focus on the signal, not the noise

   Remember that corrections and bear markets are normal parts of an investment cycle. It's not you, it's the market. CNN has a mood tracker dedicated to putting a number on how scared or brave the market is feeling at any time. Heightened emotions hint at heightened volatility. Just because everyone else is scared or jubilant, doesn't mean you have to be.

2. 2

   Manage your emotions

   If you know you're in for the long haul, considering dollar-cost averaging, or setting up a regular investment plan might help take the emotion out of investing. If you expect prices to fluctuate, it may not feel like a loss when they do, and if you do decide to sell, it won't be because you're panicking.

3. 3

   Zoom out

   The broader market has made it through every downturn and correction so far. It can help to keep this in mind through the ups and downs.

4. 4

   Think of your grandparents' grandparents

   It wasn't easy then, and it's still not easy now. But that doesn't mean it won't be worth it. Here's Jon Hume in 1888, again, with the reminder that humans are gonna human.