Some investors view volatility as entirely bad, making it difficult to accept that volatility can represent the potential for gain as much as the potential for loss. More importantly, some investors forget that volatility, whether it lasts a day, a week, or a year, has historically been short-term.

Looking at short-term volatility from a long-term perspective can change investors' perception 

Figure 2 shows the results of that volatility with a $10,000 investment in the same index as Figure 1, over the same time period. Instead of focusing on the shifts, investors can see the overall effect of the 12.35% average annual return. Creating a portfolio that's properly diversified across several different asset classes and investment types can also help reduce volatility while still helping investors meet their long-term financial goals.

Two very different reactions to volatility that led to an $894,314‬ difference in returns

In Figure 3, each investor started with $10,000 invested on 12/31/81 into the S&P 500 Index. However, the opportunistic investor invested an additional $2,000 each time the market dropped 8% or more in a month, while the apprehensive investor shifted assets to safer investments. Ultimately, the opportunistic investor had a significantly higher investment value at the end. (This is for illustrative purposes only and assumes no taxes or transaction costs.)

Despite the growth potential of equities, market drops can still be uncomfortable

Keep in mind that there have been seven bear markets from 1982–2021.⁶ The seventh and most recent bear market began in March 2020. The previous six averaged a little under one year in length and the average decline was 35%.⁷ Historically, the probability of a bear market occurring is only about one in every four years. But what's more important than what happens during these bear markets is what happens after they occur. For example, on 12/31/1982, the S&P 500 Index was at 141. On 12/31/2021, the S&P 500 closed at 4,766,⁸ which is more than 33 times higher than it was at the end of 1982.

The big surprise

The apprehensive investor who panicked in times of volatility, shown in orange in Figure 3, was able to avoid some of it but also ended up with far less assets than the opportunistic investor. Because when the market dropped 8% in a month, the apprehensive investor moved 20% of their assets into cash investments. After several of these moves, the investor was completely invested in "safe" cash, missing the growth experienced by the opportunistic investor.

When the market gets rough, remember these three things 

First, it's natural to want consistent returns. But in the short term, returns can be quite volatile. Second, looking at short-term volatility from a long-term perspective can change its significance completely. Third, viewing volatility as an opportunity instead of a threat can lead to far different results.

Don’t fly without instruments

When market corrections or bear markets occur, getting out of the market is tempting. Like the pilots flying in the simulator, not seeing things clearly can lead to poor outcomes. Even though market drops are uncomfortable, there's value in sticking with a diversified portfolio over the long-term.