Understanding Market Volatility: A Guide for Long-Term Investors

Market volatility can be unsettling, especially when headlines focus on short-term declines. However, it's important to understand that fluctuations are a natural part of investing, particularly when you have a long-term perspective. This guide is designed to help you navigate periods of uncertainty, clarifying why market swings occur and how they can work to your advantage over the long haul.

What is Volatility?

Volatility refers to the degree of variation in investment prices over short periods. Think of it as the weather: some days are sunny, while others might be stormy. Just as a few rainy days won’t ruin the year, a temporary drop in the market doesn’t necessarily affect your long-term investment goals.

For long-term investments such as IRAs and diversified general investments, these short-term fluctuations are typically smoothed out over a 3+ year horizon.

Key Points:

• Natural Fluctuations: Market prices move up and down daily due to a range of factors—from economic news to investor sentiment.
• Long-Term Growth: Over a period of five to ten years, the overall trend for well-diversified investments has historically been upward. Market fluctuations, even if they amount to 5% or 10% drops in the short term, are less significant when viewed against your long-term goals.

The Long-Term Perspective

Historically, equity markets have shown that they can reward patient investors. By focusing on long-term trends rather than daily movements, investors can take advantage of the market’s overall upward trajectory, without succumbing to the pitfalls of trying to pick stocks that outperform the market. This is especially true for managed portfolios like Wahed’s that are designed to withstand temporary declines while aiming to capture long term growth.

In light of the recent market downturn, we understand that you may be feeling unsettled—and you’re not alone.

The sharp three-day selloff we witnessed last week ranks among the steepest declines in S&P 500 history since World War II. It now stands alongside pivotal moments like Black Monday in 1987, the 2008 financial crisis, and the COVID-19 market shock of 2020¹.

However over the long term its important to remember that the market has always recovered after these steep declines.

So while it’s tempting to panic or “wait things out,” history tells a different story: long-term investors who stay the course often come out ahead.

Taking Advantage of Volatility

If you’re investing for the long term, does it really matter if markets are down five or even 10% today or tomorrow? What matters most is the state of the market when you plan to access your money—typically five to ten years down the line. Volatility can actually work in your favour:

• Buying Opportunities: When the market dips, stocks are available to buy for less than they were previously. This means you can potentially purchase shares at a discount.
• Historical Returns: From 1928 through November 2024, the S&P 500 delivered an average annualized return of 10.06%. After adjusting for inflation, the real return during this period was approximately 6.78%—a reminder of how staying invested over the long term can be a powerful tool in building wealth, especially when guided by consistent, halal investing principles².
• Strategic Risk Management: When you are nearing the time when you need access to your money, that’s when you could look into moving to a lower risk portfolio - like Wahed’s Very Conservative or Conservative portfolios. Until then, staying invested during short-term volatility may help you benefit from market recoveries and long-term growth.

The Role of Diversification

A well-diversified portfolio is one of the best defences against market volatility. By spreading your investments across various asset classes and regions, you help ensure that a downturn in one area can potentially be offset or hedged by another.

• Risk Reduction: Diversification helps smooth out the performance of your overall portfolio.
• Balanced Exposure: It allows you to benefit from the growth potential of different markets while mitigating the impact of any single market’s volatility.

What Can You Do During Volatile Times?

• Keep a Long-Term View: Instead of reacting to daily market fluctuations, focus on your long-term investment horizon. Remember, the value of your portfolio over a decade is what truly matters.
• Remember Pound Cost Averaging: Consistent investing, even during market dips, can lower the average cost of your investments and position you for greater gains when the market recovers.
• Ask for More Information: We’re here to explain your portfolio’s strategy and help you understand how volatility fits into the broader picture.

Final Thoughts

Market volatility is an inevitable part of investing. If you’re planning to access your money in five to ten years, short-term dips should not be a cause for alarm. Embracing volatility can enable you to potentially buy investments at a discount, which could boost your returns over time. While it’s natural to worry during downturns, history shows that markets tend to recover—and often exceed previous levels.

For those nearing the time to access their funds, transitioning to a lower-risk portfolio can help take volatility off the table. But if your investment horizon is long-term, staying the course and capitalising on temporary market declines could be the key to realising your financial goals.

Invest wisely, keep calm, and let time work in your favour.

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Frequently Asked Questions (FAQ)

Should I sell my investments if the market is falling sharply?

It might be tempting to sell when you see significant losses, but selling during a downturn can lock in those losses. Instead, consider your long-term goals. If your investment horizon is 5+ years, short-term dips can actually present buying opportunities rather than reasons to exit your position.

How do I know if a market dip is temporary?

Markets naturally fluctuate, and short-term declines often recover over time. Look at historical trends, which show that markets generally bounce back from downturns. If your investment plan is for the long term, a temporary dip shouldn’t derail your strategy.

Should I consider buying more during a downturn?

If you’re comfortable with the risks and have a long-term perspective, buying during a downturn can be a smart move. By investing more when prices are lower, you may benefit from greater growth when the market recovers. This is often referred to as “buying the dip.”

I’m feeling anxious about the market’s performance today—what can I do?

Anxiety during market volatility is completely normal. Instead of making immediate decisions, take a step back and review your long-term investment strategy. Consider speaking with our team for reassurance and guidance. Remember, market fluctuations are part of the journey, and staying focused on your long-term goals is key.

What if I’m unsure whether my risk level is appropriate for my current situation?

If market volatility is causing you discomfort, it might be worth reviewing your risk profile. As you approach the time when you need your funds, shifting to a more conservative portfolio can help reduce risk and volatility

Sources:

1. 8 charts show the dramatic fallout from Trump’s 'Liberation Day' announcement
2. S&P 500 Average Returns and Historical Performance