By Kyle Tetting
“Liberation Day” arrived, and markets responded as expected. Broad measures of stocks declined, while the CBOE Volatility Index, or VIX, spiked more than 20% at the open the day following historic tariff announcements April 2. Remarkable reaction was predictable. However, volatility – specifically, expectation for volatility – is a poor tool for managing investments.
At its core, volatility is a reflection of uncertainty. Normally, we view volatility as a negative, as evident in the early response to the tariff announcements. But it can also lead to positives. Over the last 20 years, seven of the 10 best trading days occurred within two weeks of the 10 worst trading days for the S&P 500. Six of those seven best days occurred just after the worst. In other words, historically, uncertainty resulting in market volatility has cut both ways.
It’s obvious in hindsight, but big down days from uncertainty have tended to see recovery as the path forward becomes clearer. Recoveries don’t mean an immediate resolution to the uncertainty but rather a slow realization that the range of outcomes may not be as devastating as we initially thought.
Time in the market
The challenge, at least historically, has been staying invested through intense periods of market stress. According to data from J.P. Morgan Asset Management, investors who missed just 10 of the best days of returns for the S&P 500 in the 20 years ending Dec. 31, 2024, experienced returns 4.3 percentage points lower than investors who stayed fully invested.
In other words, a 10.4% per year return on the S&P 500 became a return of just 6.1% per year by trying to get out of the way of market stress and inadvertently missing the good days that followed.
Learn more
Seeking balance amid volatility, by Kyle Tetting
One thing that’s certain: Uncertainty, by Joel Dresang
Cautious optimism: A Balancing act, by Kyle Tetting
Volatility: Stock market vs. your portfolio, a Money Talk Video with Kyle Tetting
Why investments outperform their investors, a Money Talk Video with Kyle Tetting
Controlling risk
With the best tending to follow the worst, the feeling that we’re taking control during these periods of market stress ignores the fact that we had taken control of market volatility long before.
Despite an S&P that had declined 4.27% in the first quarter of 2025, value stocks, bonds and non-U.S. investments were mostly positive. The principles of diversification and balance, despite every opinion piece to the contrary, proved their worth amid the uncertainty of the lead-up to the tariff announcement.
More importantly, the prepared response to this latest volatility was the quarters of conversations we had leading up to the tariff announcement: Making sure we were paring back on risk and planning ahead for cash needs, while extolling the virtues of bonds – despite the poor performance of 2022 and many questions on the role bonds would play in the future.
It’s not that we knew the what, when or why of the next period of market volatility. It’s that we knew it would eventually be something, and despite our best efforts, we can’t predict it. No one can.
Questions to weigh
This time around seemed more predictable, but the challenge now is to what end? Are tariffs here to stay and to what extent? Are there regions, sectors or areas that may see better terms or conditions than others? The answers to such questions seem less predictable but are integral to whatever responses we might otherwise choose in the face of this uncertainty.
By its nature, volatility can disappear as quickly as it arrives. To that end, I continue to believe that appropriate balance remains the best approach rather than risking a response in the wrong direction. Periods like this serve as the perfect proving ground for our balanced approach for each individual investor. Rather than doing nothing, we should use periods of market volatility to address the following questions:
- Am I comfortable with the overall level of risk I’m taking in my portfolio? It’s an easy question to answer when markets are largely positive, but it means more when stocks are down.
- Do I have enough in less volatile assets to weather a protracted storm? Phase of life plays a big role, but each of us has a slightly different way to answer this question.
- Has the current environment created opportunities? While every market decline is different, we often find deals amid periods of volatility. It’s important to remember that many things are cheap for a reason, but overall market volatility can be a great time to put cash to work.
Not addressed amid any of this is a larger conversation about fundamental shifts in investment thinking. Daily volatility speaks to technical reactions to uncertainty, but a single day of trading tells us nothing about longer-term fundamental shifts. Those shifts in thinking carry all the weight in deciding how we invest going forward.