Most investors want the return without the ride.
They want the long-term growth equities can provide, but without the 5, 10 or 15 per cent declines that periodically come with them. Markets rarely offer that bargain.
The same market decline can mean very different things to different investors. For some, it may have little effect on near-term plans. For others approaching retirement, drawing income from their portfolio or preparing for a major life event, the consequences can feel very different. Volatility therefore needs to be considered within the context of an investor’s broader financial situation, not simply their investment portfolio.
Volatility is not necessarily a sign that something has gone wrong. It is the price of admission for investors seeking higher long-term returns. When markets are falling, however, normal volatility rarely feels normal.
What ‘normal’ actually looks like
According to Ned Davis Research, going back to 1928, the S&P 500 has experienced an average of 3.4 pullbacks of 5 per cent or more and 1.1 corrections of 10 per cent or more in a typical calendar year. Bear markets of 20 per cent or more have occurred roughly once every 3.5 years.
The size of those declines is equally revealing. My review of Bloomberg data shows that from 2000 to 2025; the S&P 500 experienced an average maximum drawdown of 15.7 per cent during the year. Yet the index still finished with a positive calendar-year return in 19 of those 26 years, or 73.1 per cent of the time.
Canadian equities show a remarkably similar pattern. Over the same 2000 through 2025 period, the S&P/TSX Composite experienced an average maximum drawdown of 15.1 per cent during the year. Yet it too finished higher in 19 of those 26 calendar years, or 73.1 per cent of the time.
Even 2025 is a useful reminder. The S&P 500 fell roughly 19 per cent at its worst point during the year yet ultimately finished about 16 per cent higher. The S&P/TSX Composite experienced a 12.3 per cent drawdown yet finished the year 28.2 per cent higher.
A 10 or 15 per cent decline can feel extraordinary in the moment. History suggests it is anything but.
The toll is not the destination
This is where investors can confuse volatility with permanent loss.
A drawdown tells us how far prices have fallen, not where markets will ultimately finish or whether the long-term investment thesis has changed.
Markets can move sharply because of interest rates, economic data, geopolitics, positioning or sentiment. Over longer periods, corporate profits, cash flows, and economic growth tend to matter much more.
Volatility is the toll. It does not necessarily mean the destination has changed.
That does not mean every decline should be ignored. Fundamentals can deteriorate; valuations can become excessive and individual companies can suffer permanent impairment. The key is distinguishing between temporary price movements and genuine changes in long-term fundamentals.
When volatility becomes expensive
Volatility often becomes most damaging when it changes investor behaviour.
Renowned investor Howard Marks once observed that “volatility can prey on investors’ emotions, reducing the probability they’ll do the right thing.” That may be one of the most important lessons to remember when markets become uncomfortable.
Selling after a large decline can make losses permanent that might otherwise have been temporary. Waiting for markets to “feel safe” can be just as costly, because recoveries often begin before the broader outlook improves.
A portfolio that looks perfect on a spreadsheet but causes an investor to abandon the strategy during a significant correction is not the right portfolio.
That is why asset allocation matters. Cash and high-quality fixed income can provide stability, income, and liquidity, reducing the need to sell growth assets during market weakness. Equities can provide long-term capital appreciation and help preserve purchasing power.
The goal is not to eliminate volatility, but to take an amount of risk an investor can realistically withstand.
Prepare rather than predict
No one knows precisely when the next 5, 10 or 20 per cent decline will occur. History suggests only that another one eventually will.
Portfolios should be built for uncomfortable periods, not on the assumption that they can always be avoided.
Market declines are loud, immediate, and highly visible. Long-term wealth creation is quieter and rarely happens in a straight line.
Volatility is the toll investors pay along the way. The goal is not to avoid it entirely, but to ensure both the portfolio and the investor are prepared for the journey. Each investor needs a portfolio aligned with their objectives, time horizon, liquidity needs, and risk tolerance, within the context of their broader total wealth plan.
