The hidden link between turbulence and returns

We have had a particularly interesting start to the year so far in 2026. Before we get into the body of today’s topic, it’s worth just reviewing what we’ve seen happen in financial markets this week.

Markets have seen a wave of geopolitical conflict and shifting economic expectations over the past week or so. The most significant catalyst was the outbreak of ‘war’ between the US/Israel and Iran, which sent shockwaves through energy and commodity markets in particular. 

Following joint military strikes on Iran on February 28th, and the subsequent retaliation, oil prices surged. On Monday, Brent crude oil breached the $100 per barrel mark for the first time in four years, even hitting intraday highs near $120. For reference, Brent crude oil prices have generally bounced between $60-$80 a barrel in the last five years (notwithstanding a few major out-lying events like Covid and its economic overspill in 2022).

Most of this price shock has been driven by uncertainty around supply. The Hormuz Straight, which Iran coastlines the majority of, and which ultimately acts as a shipping conduit between the Gulf states and the rest of the world, sees some 20% of the world’s supply of oil and gas pass through it. When tensions flare in the region, the companies responsible for shipping and insuring large oil and gas tankers (which carry hundreds of millions of dollars worth of commodity), are understandably less eager to continue operations.

Of course, oil and gas (and energy more broadly) act as the lifeblood to our economy. They can and do have a major influence on inflation. After all, it’s almost impossible to find a product whose input cost isn’t, in one way or another, impacted by the price of energy. 

Moreover, last week’s US non-farm payrolls data for February showed a loss of 92,000 jobs, far missing the expectations of a 50,000 gain. This suggests the US economy may be weakening just as prices could be rising.

In combination, investors are increasingly worried about stagflation, a mix of stagnant economic growth and high inflation. The sudden spike in energy costs is expected by some to undo recent progress in cooling inflation – at least assuming the price of oil and gas don’t quickly re-trace to their previous levels.

Prior to the conflict, markets were pricing in multiple rate cuts from the Federal Reserve and the Bank of England for 2026. Because of the oil-driven inflation threat, markets have pivoted. The swaps market now suggests that rate raises could be on the cards, or at the very least, that rates could be higher for longer. Cutting rates to help the softening job market could worsen inflation, while hiking to control prices could hamper job growth.

Accordingly, we’ve seen a volatile week in financial markets.

So, let’s talk about volatility

As a word, volatility tends to have negative connotations, and to the casual investor is often synonymous with chaos or impending loss. In technical terms, however, it is simply a statistical measure of the dispersion of returns for a given financial security. It represents the frequency (speed) and the magnitude (size) of an asset’s price swings over a specific period. 

Our associations with the word are often a matter of perspective, timeline, and emotional fortitude. For the short-term investor or someone nearing retirement, volatility can be a formidable adversary. It’s difficult to plan for major life purchases or maintain a stable retirement income when the value of one’s holdings can shift by several percentage points in a short period of time. Indeed, if an individual is forced to liquidate assets to fund their living expenses during a sharp market downturn, they effectively lock in those losses (or reduced gains) and diminish the future longevity of their portfolio. For these reasons, investors with relatively short time horizons may generally prefer to minimise their volatility.

Beyond the mathematical risk, volatility acts as a sort of psychological stress test. Human psychology is naturally wired to avoid pain, and in the world of investing, the rapidly falling values of our investments can trigger a fight-or-flight response. This often leads to the most common mistake in personal finance selling at the bottom. When the fear gauge rises, many investors abandon their long-term strategies in a moment of panic, only to miss the eventual recovery. Volatility can, therefore, become a destructive force that erodes both capital and confidence.

A more nuanced view might be that volatility is essentially the price of admission for greater long-term returns. Without the presence of risk and the fluctuations that accompany it, there would be no equity risk premium. For the avoidance of doubt, this term describes the premium (higher expected returns) that investors expect for holding stocks precisely because they are more volatile than “risk-free” assets like government bonds or savings accounts. For an investor with a multi-decade horizon, volatility creates windows where high-quality assets are sold at a discount due to temporary external shocks, such as wars. To the long-term investor, it should be seen as a recurring opportunity, as opposed to a threat. 

Ultimately, volatility is a neutral market characteristic that serves as a tool for some and a trap for others. 

While the current atmosphere feels precarious, history suggests that volatility is almost always mean-reverting; that abnormal highs and lows eventually recover towards normality. The peaks of fear eventually subside into periods of relative calm, rewarding those who can separate the temporary noise of price swings from the underlying value of their investments.

As investors we should bear this all in mind. Attempt to muffle the noise of the present and remind ourselves what our goals are. The “perfectly rational” investor (and I acknowledge that nobody is perfectly rational), would not have their long term goals sidelined by short term noise.

Timing the market or time in the market?

There is a specific kind of vanity that plagues us as modern investors. It is the belief that because we have instant access to information, we can somehow outrun the collective psychology of the world. We look at a chart and see highly volatile swings, and we feel a biological imperative to do something.

The problem is that the market is a complex adaptive system. It is a giant, global machine that processes news incredibly quickly. By the time you decide the world is too dangerous and move your portfolio to the sidelines, the market has already priced-in that danger. Most people will not be able to beat the panic, but rather arrive at the tail end of it – in stark contrast to the old adage “buy the rumour, sell the news”.

In the spring of 2025, during the height of US President Donald Trump’s tariff shock, the S&P 500 (the stock market index tracking the performance of 500 leading companies listed on stock exchanges in the United States) shed nearly 19 percent in a matter of weeks. An investor who liquidated their assets just as the volatility index jumped, would have felt like a genius for about 14 days. But the market doesn’t wait for a formal letter of apology from the world’s leaders or central bankers to begin its recovery. It can turn on a dime, often while the headlines are still catastrophic. 

To time the market successfully, you need to be right about when to leave, and you have to be right about when to come back. And for a retail investor, the all-clear signal to come back, be it headlines, news, or markets themselves, usually doesn’t arrive until after the majority of the recovery has already happened. This is precisely why timing the market is so hard.

Various research papers suggest that if you miss just a handful of the best trading days in a decade, your total compounded returns can be exponentially lower. Indeed the table below looks exclusively at the S&P 500 over the last ten years. Missing the ten best days would’ve resulted in your portfolio being around 67% worse off than having stayed invested. Ironically, those best days almost always occur in the middle of bad months. 

Indeed in the 10-year example below, almost all of the best days occurred during the height of Covid uncertainty in 2020. These good days aren’t just important for your recovery from bad days, but also because they go on to play a meaningful role in the compounding that is so crucial to obtaining strong long-term returns. They tend to happen when volatility is still high, when the news is still bleak, and when your gut is telling you to move to cash. 

The strategy of liquidating when fear rises assumes that you can outsmart the hive mind. But history shows that for the retail investor, time in the market is a far more reliable engine of wealth than timing the market. The most radical thing you can do when volatility rises is nothing at all. 

Let’s dig into the data for a second, because I think there is a counterintuitive truth here that we often miss. To understand the relationship between market chaos and long-term gains, let’s look at two specific gauges the S&P 500 (our proxy for the market) and the CBOE VIX (a proxy for volatility).

Think of the VIX as a “fear gauge.” It measures the levels of volatility in the S&P 500. Ordinarily, it hums along between around 15 to 20. Once you cross that 20-point threshold, things are getting shaky, and once you move past 25, you’re looking at more serious instability.

Over the last decade, the average (mean) VIX level sat at 18.43. However, if you isolate the best days in the market, the top 10% of trading days where returns were highest, the average VIX on those days wasn’t lower; it was significantly higher, averaging 23.78.

Crucially, the mechanics of these best days reveal a fundamental law of market dynamics on the day the S&P 500 makes a significant leap upwards, the VIX generally drops by an average of -2.11 points; a collective sigh of relief from the markets. The large gain in the S&P 500 acts as a solvent for market uncertainty, dissolving fear and driving the VIX lower in real-time.

Critics might argue that these good days are merely a byproduct of the chaos – that they only occur during periods of elevated volatility because they are the natural reaction to a sharp sell-off shortly beforehand. While this is generally true, it misses the broader reality. Markets have historically always spent longer going up than they have going down. We are, essentially, an optimistic species that occasionally panics. But as we’ve observed, if we are seeking the highest rates of return, it is absolutely essential that we are in the market for these explosive upward corrections, rather than sitting on the sidelines waiting for a permission slip.

Let’s try and visualize that point with a more comprehensive graph.

Plotted above is a chart that contains two lines, representing Investor A and Investor B over the decade spanning 10-years from March 10, 2016, to March 9, 2026. Investor A represents the patience of the long-term holder they invested $10,000 and simply let the compounding engine run.

Investor B, however, attempts to time the markets with a seemingly rational rule. They also invest $10,000 into the S&P 500, but they decide to sell their shares whenever the VIX hits its 90th percentile (27.57), a level that indicates acute distress. They only re-enter the market once the VIX has cooled to its 50th percentile, presumably feeling confident that markets have returned to a normal state. During those stretches on the sidelines, we’ve assumed Investor B’s capital is returning a modest 2% AER.

The result is a striking testament to the cost of safety. By waiting for the 50th percentile to return, Investor B inevitably misses the initial, most powerful phase of every recovery the very days where the VIX is dropping. In the context of the 2020 pandemic the two investors’ returns begin to meaningfully diverge as B sits out of the market during an abnormally volatile year. During the 2022 inflation, and the 2025 tariff crisis, Investor B similarly found themself standing on the platform long after the train had left the station. In all scenarios, Investor B was able to reduce their levels of volatility and downside, but in doing so, continually impeded their ability to compound returns.

Please remember that when investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. The views expressed here should not be taken as a recommendation, advice or forecast. If you are unsure investing is the right choice for you, please seek financial advice.