Catherine Yoshimoto
- Emotional bias drives costly reactions - panic selling during downturns or chasing winners during rallies often leads to missed recoveries or late entries.
- Market timing rarely works - anchoring and hesitation can cause investors to miss strong rebounds that historically occur faster than expected.
- Long-term discipline beats short-term noise - consistent allocation, avoiding crowd behaviour, and sticking to a systematic approach improves outcomes in volatile markets.
Market volatility is often viewed by investors as a threat but it’s better understood as a defining feature of investing. From the dot-com era to the global financial crisis, the pandemic shock and recent inflation swings, each equity market cycle has tested investor resolve through bouts of volatility.
Reviewing decades of price history in the Russell US Indexes, one truth stands out: how investors respond to volatility often matters more than the volatility itself.
Volatility stirs familiar emotions, including fear and overconfidence. These reactions are natural, but a lack of awareness of our own cognitive biases can lead to costly missteps. Looking back at past cycles reveals practical lessons for navigating the next bout of turbulence with greater discipline and perspective.
Lesson 1: Selling at peak panic can be costly
When markets fall sharply, fear spreads quickly. Loss aversion - the tendency to feel losses more acutely than gains - often drives investors to sell at precisely the wrong time.
During the sharp COVID-19 market downturn in early 2020, for example, the Russell 3000® Index dropped more than 20% in one month, yet it went on to set new highs the following year (see Chart 1). Investors who sold into the panic may have locked in losses and missed the rebound.
Chart 1: Russell 3000 daily price index levels from 31 Dec 2019 to 31 Dec 2021.
Lesson 2: Avoid chasing winners
Just as fear drives panic selling, euphoria can push investors toward riskier behaviour. Rallies can fuel overconfidence and performance-chasing: buying what’s rising instead of what fits a plan. Recency bias reinforces this, as investors assume recent trends will persist.
In early 2021, for example, the Russell 2000 Index soared as post-pandemic reopening enthusiasm drew many investors into small-cap stocks just as momentum was peaking. When inflation accelerated and policy conditions tightened later that year, returns flattened and then reversed through 2022, catching many late entrants into the small-cap market off guard (Chart 2).
A similar pattern emerged more recently with large-cap technology stocks. The so-called “Magnificent Seven” dominated market returns in 2023, lifting growth-oriented benchmarks such as the Russell 1000 Growth Index. Yet by mid-2024, that narrow leadership had begun to fade as valuations moderated and sector performance broadened. In 2025, the earlier pattern has repeated as a few large-cap stocks have dominated the returns of the large-cap index (Chart 3).
Chart 2: Russell 2000 quarterly returns table 2021-2022 (inclusive)
| % 3-month Total Return | Russell 2000 Total Return USD |
|---|---|
| 2021/03/31 | 12.70 |
| 2021/06/30 | 4.29 |
| 2021/09/30 | -4.36 |
| 2021/12/31 | 2.14 |
| 2022/03/31 | -7.53 |
| 2022/06/30 | -17.20 |
| 2022/09/30 | -2.19 |
| 2022/12/31 | 6.23 |
Source: FTSE Russell, data as of December 31, 2022. Past performance is not a guarantee of future results. See the end for important disclosures.
Chart 3: Mag 7 weight in Russell 1000 31 December 2022-30 September 2025.
It’s often difficult for us to be aware when we have become too optimistic, particularly when the crowd around us is celebrating price gains in the same stocks. That’s why staying grounded in long-term allocation targets and resisting the urge to chase momentum or stretched valuations can help portfolios avoid setbacks.
Lesson 3: Perfect timing is a myth
Even experienced investors fall into the trap of waiting for the “right moment” to invest. This hesitation often stems from anchoring: fixating on a past market level or price to obtain a better entry point. When markets rebound faster than expected, those on the sidelines can miss meaningful gains. Waiting too long can then lead us to “throw in the towel” and panic buy later, missing the bulk of the uptrend and potentially damaging performance if the trend then reverses.
For example, after the sharp decline in early 2020, the Russell 3000 Index regained its pre-pandemic level in less than five months. Investors who were anchored to the idea that prices would “come back down” likely missed the swift rebound. Similar patterns played out after the 2008 global financial crisis and other bear markets, where recoveries began long before sentiment turned positive.
Systematic approaches—such as dollar-cost averaging or regular portfolio contributions—can help investors stay engaged through uncertainty and benefit from compounding over time. In volatile markets, consistency often outperforms precision.
Learning from past market volatility
Sometimes, markets reach such levels of over- or undervaluation that it can take years or even decades for trends to correct. Famously, after the 1929 Wall Street crash, market averages only regained their pre-crash levels during the 1950s. There’s little any investor can do about such major trend reversals.
But this doesn’t mean we shouldn’t apply the lessons of this blog consistently in our day-to-day portfolio management. Every equity cycle teaches patience and perspective. And learning from past reactions can turn volatility from a source of anxiety into a tool for long-term success.
Sources
[1] Sustainable investment asset owner survey 2023 | Back to Note 1
[2] Solving the Scope 3 conundrum (lseg.com) | Back to Note 2
[3] Results of the 2021 Climate Biennial Exploratory Scenario (CBES) | Bank of England | Back to Note 3
[4] Investing in the green economy 2023 - entering the next phase of growth (lseg.com) | Back to Note 4
[5] Mobilising capital for a sustainable global economy (lseg.com) | Back to Note 5
[6] IFRS - Global investor support for the launch of the IFRS Sustainability Disclosure Standards | Back to Note 6
[7] IFRS - IFRS Foundation and EFRAG publish interoperability guidance | Back to Note 7
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