Why market volatility shouldn’t be feared

09 November 2026

The recent turbulence in financial markets has underlined the importance of understanding the role volatility has to play in investment performance, and that it should not be something feared by investors.

Financial markets stumble from time to time, and occasionally they fall. When they do, ‘volatility’ becomes the industry buzzword. Volatility refers to how much and how often asset prices change. For instance, if an investment’s price regularly moves 1-2% each day, it’s considered more volatile than an asset that moves just 0.5% daily. Riskier assets are naturally more volatile. The upside is that higher risk usually brings higher long-term returns. This is a key principle in finance: investors are paid to take risks.

That is why it’s important to diversify a portfolio across different asset classes. In a well-constructed portfolio, different assets react differently to economic events, which can reduce overall volatility. As Nobel Laureate Harry Markowitz famously said, “diversification is the only free lunch in investing.”

Driven by the Democratic ‘blue wave’ in US midterm elections, the recent sharp fall in US equities was concentrated in crowded AI and technology names, while the broader market has held up moderately better. Earnings expectations remain resilient, tech valuations in general remain attractive versus the wider market, and credit markets show little sign of broader financial stress.

This was essentially a sell-off driven by concerns over the pace of data centre build-out following the US midterm elections and is mainly a rotation out of exposed tech sectors. It hasn’t prompted a big rise in risk aversion across the broader stock market, but that’s what should be watched for.

In a perfect world, investors would sell just before market volatility hits and buy back when prices drop. But timing the market that perfectly is nearly impossible, even for seasoned investors. Making a habit of selling assets every time there’s market volatility or economic changes would be both risky and costly. Over time, staying out of the market for too long can hurt your portfolio, as markets tend to rise more often than they fall.

What can investors learn from this recent example of market volatility, and similar events in the past? First, as an investor, you are rewarded for taking risks. Don’t fear volatility; it’s the reason that assets provide higher returns over time. The key question to ask is whether market volatility changes your fundamental view of an asset. In most cases, the answer will be no.

Unless something fundamentally changes the value of an asset, it’s usually best to ride out the volatility as panicked markets often overreact. If you sell during the panic, you may not be able to buy back later at the same or a lower price, and you risk missing out when the market recovers. Finally, always have a diversified portfolio. Diversification works because it reduces risk while allowing for long-term returns at higher rates than cash. This brings us back to the basic point: investors are rewarded for taking risks.