Understanding Volatility: Why Markets Fluctuate and How to Deal With It

What is market volatility?

Market volatility measures how much and how quickly asset prices rise and fall over time. Financial markets constantly react to new information, which can directly impact prices.

Volatility is often driven by factors such as company earnings and financial results, economic data like inflation or interest rates, political decisions and policy changes, geopolitical events, and shifts in investor sentiment.

Volatility is therefore not unusual; it’s a normal and essential feature of functioning markets.

In short: volatility reflects how markets respond to new information.

Why volatility can be intimidating

Periods of high volatility often bring sharp price movements. This can create pressure to act quickly, either to buy before prices rise further or to sell before they fall more. This behaviour is often linked to “timing the market”, meaning trying to buy at low prices and sell at high prices.

However, consistently timing the market is difficult because:

• Short-term movements are unpredictable
• Emotional decisions can lead to poor outcomes
• Selling during downturns can mean missing recoveries

Investors who exit the market during declines risk missing potential future gains when markets rebound.

In short: reacting to short-term movements can make investing more difficult.

Why “buy and hold” matters

Historically, financial markets have rewarded patience, even after periods of volatility. A long-term investment strategy, often called buy and hold, focuses on staying invested rather than reacting to short-term movements.

Benefits of staying invested include:

• Participation in market recoveries
• Reduced impact of short-term fluctuations
• Ability to capture long-term growth potential

Instead of trying to predict market movements, many investors rely on discipline, diversification, and a clear investment plan.

Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed.

Example: Volatility and recovery in the MSCI World Index

Looking at historical data can help illustrate how volatility plays out in practice. The MSCI World Index tracks large and mid-sized companies across developed markets, offering broad exposure to global equities.

Over the past decade, the index has not moved in a straight line. Short‑term periods can look dramatic, but longer‑term trends tell a different story.

As an example:

• 2022: Market decline of approximately -18%, driven by rising interest rates, inflation concerns and geopolitical tensions
• 2023: Strong recovery of around +23%, supported by easing inflation and improved market sentiment

Source: MSCI, 30.01.2026

This sharp rebound highlights an important principle: markets can recover quickly after downturns. For long‑term investors, short‑term volatility often becomes less significant over time as gains and losses even out.

Note: Past performance is not a reliable indicator of current or future results. The index returns shown do not take into account management fees, transaction costs or other costs. Indices are not actively managed, and it is not possible to invest directly in an index.

How investors can deal with market volatility

Volatility can’t be avoided, but it can be managed with the right approach.

• Practical ways to respond include:
• Setting clear investment goals
• Maintaining a long-term investment horizon
• Building a diversified portfolio
• Staying patient and avoiding reactive decisions

Understanding that market fluctuations are normal can help investors remain calm during periods of uncertainty.