Market Volatility: When +35% Then -20% is Fine, and When It's Financial Suicide

Last month, I had two very different conversations about market volatility that perfectly illustrate why time horizon changes everything in investing.

The first was with a 30-year-old whose portfolio had dropped 20% in recent market turbulence. "Should I be worried?" he asked.

The second was with a 60-year-old approaching retirement whose pension had experienced similar volatility. "I can't afford this," she said.

They were both absolutely right.

The Tale of Two Time Horizons

Let me paint a picture that explains why the same market movement can be either completely acceptable or genuinely dangerous, depending on your circumstances.

Scenario One: The 30-Year-Old

• Current portfolio value: £50,000

• Time until retirement: 35 years

• Recent performance: Up 35%, then down 20%

• Net position: Still ahead, with decades to recover from any losses

Scenario Two: The 60-Year-Old

• Current portfolio value: £500,000

• Time until needing the money: 5 years

• Same performance: Up 35%, then down 20%

• Net position: Gains wiped out, with limited time to recover

Same market. Same percentages. Completely different implications.

Why Time Is Everything

When you're 30 years old with seven stocks that swing wildly - up 35% one year, down 20% the next - you have something invaluable: time.

Those 35 years until retirement give you multiple market cycles to ride out. You'll experience several bear markets, numerous corrections, and hopefully many bull markets. The volatility that keeps you awake at night in your thirties becomes background noise by your fifties.

More importantly, you're likely still contributing to your investments regularly. When markets fall, your monthly contributions buy more shares. When they rise, you benefit from the shares you bought cheaply during the downturns. This pound-cost averaging effect actually makes volatility work in your favour over long periods.

But when you're 60 and planning to access your money within five years, volatility becomes your enemy.

The Sequence of Returns Risk

Here's what many people don't understand: it's not just about average returns over time. It's about the sequence in which those returns happen.

Consider two identical portfolios with identical average returns over 20 years, but different sequences:

Portfolio A: Loses 20% in years 1-3, then grows steadily Portfolio B: Grows steadily for 17 years, then loses 20% in years 18-20

If you're contributing to these portfolios throughout, Portfolio A actually performs better because you buy more shares during the early low years.

But if you're withdrawing from these portfolios (like in retirement), Portfolio B will likely perform dramatically better because you're not forced to sell shares at depressed prices early in retirement.

This is sequence of returns risk, and it's why volatility tolerance must change as you approach and enter retirement.

The Practical Reality

When I tell my 30-year-old client not to worry about short-term volatility, I'm not being cavalier. I'm being mathematically accurate.

Historical data show that holding periods of 20+ years have never produced negative real returns in diversified equity portfolios. The probability of losing money over such long periods approaches zero.

But when I tell my 60-year-old client that she needs to reduce volatility, I'm recognising that she doesn't have 20 years to wait for markets to recover. If she retires into a bear market, she might never recover financially.

It's Not About Bravery

One of the biggest misconceptions about investing is that willingness to accept volatility is about courage or risk tolerance. It's not.

It's about appropriateness.

The 30-year-old isn't "braver" for holding volatile investments. The 60-year-old isn't "scared" for wanting stability. They're both making rational decisions based on their time horizons and financial needs.

Encouraging a 60-year-old to "stay the course" with a highly volatile portfolio isn't helping them be brave - it's potentially ruining their retirement.

The Transition Zone

The tricky part is the transition between these two approaches. When do you stop treating volatility as your friend and start treating it as your enemy?

There's no magic age, but here are some guidelines:

10+ years from needing the money: High volatility generally acceptable 5-10 years: Moderate volatility, begin transition to stability 0-5 years: Low volatility essential, capital preservation priority

This transition should be gradual, not sudden. Moving from 100% equities to 100% bonds overnight creates its own risks.

Beyond Just Age

Time horizon isn't just about age - it's about when you need the money and how much flexibility you have.

A 45-year-old with a secure pension might continue accepting higher volatility for money they won't need until 67. A 45-year-old planning early retirement at 55 needs to start reducing volatility much sooner.

Similarly, someone with multiple income sources can often accept more volatility than someone dependent entirely on investment returns.

The Real-World Examples

Let me give you some concrete examples from my practice:

Client A: 32-year-old software developer

• Portfolio: 90% equities, 10% bonds

• Recent volatility: Down 25% this year, up 40% last year

• Response: Increased monthly contributions during the downturn

• Result: On track for early retirement due to buying opportunity

Client B: 58-year-old teacher planning retirement at 65

• Portfolio: 60% equities, 40% bonds/cash

• Recent volatility: Down 12% this year, up 20% last year

• Response: Began shifting more assets to stable investments

• Result: Protected capital while maintaining some growth potential

Client C: 67-year-old retiree

• Portfolio: 30% equities, 70% bonds/cash

• Recent volatility: Down 5% this year, up 8% last year

• Response: Maintained course, drew income from stable portions

• Result: Preserved retirement lifestyle despite market uncertainty

Common Mistakes

Mistake 1: Young investors being too conservative I see 25-year-olds putting pension contributions into cash because they're "scared of losing money." They're losing the greatest asset they have - time - and guaranteeing they'll be poorer in retirement.

Mistake 2: Older investors being too aggressive I also see 65-year-olds with 80% equity portfolios because they "want to beat inflation." They're risking their financial security for returns they may not live long enough to benefit from.

Mistake 3: Making emotional decisions Both young and old investors sometimes make dramatic changes based on recent market performance rather than their actual time horizons and needs.

The Professional Perspective

As a financial planner, one of my key roles is helping clients understand when volatility is their friend and when it becomes their enemy.

For younger clients, I often need to encourage more risk-taking, not less. They're so focused on short-term fluctuations that they miss the long-term opportunity.

For older clients, I need to help them understand that capital preservation becomes more important than capital growth as they approach retirement.

The transition between these mindsets is crucial and must be managed carefully.

Market Highs and Volatility Today

We’re currently experiencing market highs in many sectors, which naturally increases volatility concerns. When markets have risen substantially, the potential for significant falls feels more immediate.

This is exactly when time horizon thinking becomes most important:

• If you have decades until retirement, current market levels are largely irrelevant to your long-term success.

• If you’re approaching retirement, current valuations and potential volatility should absolutely inform your strategy.

The Bottom Line

Volatility isn’t inherently good or bad—it’s appropriate or inappropriate depending on your circumstances.

The 30-year-old whose portfolio swings dramatically has time to benefit from those swings. The 60-year-old facing similar volatility may not have time to recover from the downswings.

Understanding this difference isn’t about market timing or predicting the future. It’s about aligning your investment strategy with your reality.

If you’re young, don’t let short-term volatility scare you away from long-term opportunity. If you’re approaching retirement, don’t let fear of missing out prevent you from protecting what you’ve already built.

The right level of volatility is the one that lets you sleep at night while still achieving your financial goals. And that level changes as your circumstances change.

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If you’re unsure whether your current investment approach matches your time horizon and circumstances, it’s worth having a conversation with a financial planner who can help you think through the implications. The right strategy today might be very different from the right strategy five or ten years from now.

The contents of this newsletter do not constitute advice and should not be taken as a recommendation to purchase or invest in any of the products mentioned. Before making any decisions, we suggest you seek advice from a professional financial adviser.

The value of your investment can go down as well as up, and you may get back less than the amount invested.