The Basics of Market Returns & Volatility

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Last updated: November 7, 2022

Believe it or not, talking about markets is probably the least time-consuming part of my job. That said, it’s the thing most people relate to financial advisers. 

There’s a reason that I don’t talk about it all the time with clients. It is incredibly important, and I have spent many hours researching the best strategy for investing in the stock market, but once you’re comfortable with the trends (or lack of them), there are much more important matters to focus time on. 

Markets seem scary, volatility sounds scary, and if you throw in your own financial future, plus being dependent on market returns, I can understand why. Yet, there isn’t much to be afraid of and, in simple terms, here’s why…

Diversification protects your investment

In the world, there are roughly 22,500 listed stocks and shares to choose from. Of these, circa 60% are in the US and just 4% in the UK. The others are spread around Europe and the rest of the world. Given this, we think it’s important to diversify globally, and capture as much of the market as possible rather than relying on one country, industry, or company that could ‘go under’. 

I’m aware that, equally, you could capitalise on a trend that results in high returns, but these come few and far between. The graph below shows the Equity returns (%) of developed markets from 2002 to 2021. Try and spot the trend below and predict what will happen next year. We don’t think it’s possible, and we focus on diversification and academic research, rather than guesswork.

Source:  Issued by Dimensional Fund Advisors Ltd. (Dimensional UK). Annual Return (GBP, %). MSCI developed markets country indices (net dividends). MSCI data © MSCI 2022, all rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. 

Accepting volatility

In terms of market returns, if you’re after a return from the stock markets shown above, you have to accept some volatility. Again, the graph below shows this much better than words will. It shows the US market largest gains and declines from within the year (thin black and red lines) vs the actual calendar year return (highlighted blue line). As you can see, most of the time, the markets will reward you (highlighted blue line), but only if you stay in your seat.

In US dollars. Data is calculated off rounded daily returns. US Market is the Russell 3000 Index. Largest Intra-Year Gain refers to the largest market increase from trough to peak during the year. Largest Intra-Year Decline refers to the largest market decrease from peak to trough during the year. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.

So, when people say to me “investing in the market comes with too much risk”, I often say that’s nonsense. Sure, if you are investing in 20-30 of the available 22,500 companies, you’re taking a big risk. Who’s to know what might happen to those companies? If however, you are investing in a diversified portfolio, you’re going to get a very good long-term return. Sure, there will be some negative periods, but that’s expected. Overall, the good will outweigh the bad. 

Having a Plan B

In addition to diversifying across the globe, we advise our clients to hold cash reserves and invest some of the investment funds into high-quality, short-term bonds, and gilts to ensure your investment experience matches your view on risk. 

Our golden rule – ignore the ‘noise’ of the news, ‘financial experts’, fund managers, and the bloke down the pub and stick to YOUR plan that’s been built with your trusted financial planner. Always ensure you’re investing funds for the long term and you have sufficient cash reserves to hand for short-term spending plus an emergency reserve. These come in handy if markets are down when you need to make a large purchase.  

If you would like to discuss your investment portfolio and strategy or if you’re interested to learn more, we’d be happy to grab a coffee and have an initial chat.

This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth.


The value of investments can fall as well as rise and you may not get back the amount originally invested. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. Even a long-term investment approach cannot guarantee a profit.