The value of not over-reacting to geopolitical turmoil
By Duncan Lamont, Head of Strategic Research at Schroders
Moving out of stocks in response to market disruption can be an expensive mistake.
When periods of heightened geopolitical turmoil bring volatility to equity markets, the natural temptation for investors is to retreat to the sidelines. Shifting money out of stocks and into cash or “safe haven” assets like short-term government bonds may seem like the most prudent response, but history indicates it generally isn’t. Trying to time the market can be an expensive mistake for three key reasons:
- Market disruptions after major geopolitical events have historically been short-lived, and markets have quickly recovered as the alarming headlines fade.
- Recoveries can come in abrupt bursts, and investors risk returning to the market after the biggest uptick has occurred.
- Selling equities amid turmoil can mean investors merely capture losses in a short-term downturn.
Some key reminders about volatility that can ease concerns
History provides some reassurances that kneejerk reactions aren’t necessary in times of turmoil. Following are some important lessons that past markets have offered.
1. Volatility is inevitable and occurs more often than people may realise
Over the past 54 calendar years, global equities have experienced, at some point during each year, a 10% or more decline in 31 of those years. Over the same timeframe, global equities, represented in both cases here by the US dollar-based returns of the MSCI World Index, have experienced a 20% or more decline at some point during the year in 13 of those years.
2. Even though markets can experience major downturns over the course of a year, in the past the average gains made during the year have more than offset the losses
Markets are often volatile, but over long periods, the average gains even within the course of a year, have far exceeded the losses (historically and on average). In periods of uncertainty or shock, markets can often sell off indiscriminately. Good companies are sold alongside bad ones, becoming “mis-priced”. Staying invested makes sense. Experienced, "active" investors might even go further and find buying opportunities within the turmoil.
3. Trying to time the market, by moving into cash during periods of high volatility, can greatly diminish long-term returns
The price for being skittish is quite high. In the past, investors who shifted into cash during volatile markets would have greatly reduced their long-term gains. The performance of US stocks since 1990 demonstrates that:
- Investors who moved into cash when the Chicago Board Options Exchange Volatility Index (VIX) was above its historical average and then moved back into stocks when the VIX came down below that average, would have reduced their returns since 1990 by nearly 80%.
- Even trying to be “disciplined” with this turmoil-avoiding strategy—and moving into cash only when the VIX was in the top 5% of its historical range—wouldn’t fare much better. That approach would still cut nearly in half the returns that could have been realised.
- The most rewarding strategy was to stay fully invested and not react to the volatility.
Shifting to the safety of cash didn’t pay over long investment horizons
Past performance is not a guide to the future and may not be repeated. Note: Levels in excess of 33.0 represent the top 5% of experience for the VIX. Portfolio is rebalanced on a daily basis depending on the level of the VIX at the previous close. Equity index is S&P 500, cash is 30-day cash. Data to 31 December 2025. Figures do not take account of any costs, including transaction costs. Source: CBOE, LSEG Datastream, Schroders.
4. Stocks have a far better track record than cash of delivering returns that beat inflation—over both the long and short term
Cash may seem like a safe investment, but it’s not safe to the extent that it hasn’t historically matched stocks’ track record for delivering inflation-beating returns. Since 1990, over the shortest horizon of one month, stocks match cash’s frequency of delivering inflation-beating returns—at 60% of the time. Once you look at periods of 12 months or more, stocks leave cash in the dust. At three years, stocks deliver returns above inflation 3 out of 4 times versus around half the time for cash. At 10 years, it is 87% of the time versus 54%. Over 20 years, stock returns could be counted on to beat inflation 100% of the time, while cash still only registered a 64% success rate on this scorecard.
Stocks have been proven to be less risky than cash for delivering inflation-beating returns
Past performance is not a guide to future performance and may not be repeated. Equities represented by Ibbotson® SBBI® US Large-Cap Stocks to 2024, S&P 500 thereafter, cash by Ibbotson® SBBI® US (30-Day) Treasury Bills to 2024, US Treasury constant maturity 1-month rate thereafter. Data to December 2025. Source: Federal Reserve, Morningstar Direct, accessed via CFA institute, LSEG Datastream, S&P, and Schroders.
Stay calm and follow your process
“Panic” has a pejorative sense for good reason. It suggests an impulsive reaction that can have unintended negative consequences. For equity markets, history certainly shows the value of not panicking amid market turmoil.
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