The stock market is down, and your portfolio might be too. But here’s the truth: every market correction has been an opportunity to build wealth—if you know what to do.
In this post, I’ll share three key strategies for navigating and overcoming market volatility. We’ll summarize key concepts covered elsewhere on our blog, so you can quickly be prepared and informed.
To dive deeper into any of these key concepts, feel free to browse them here:
- The History of Stock Market Volatility in the United States
- The 5 Types of Stock Correlation — With Examples and Calculations
- Risk Management for Beginners
Why is the Stock Market Volatile?
The stock market’s volatility stems from human behavior. Prices are dictated by what people are willing to pay for shares. Emotional decisions, media influence, and speculation often drive market movements rather than fundamentals.
A quote by William Feather encapsulates this:
“Every time one person buys, another sells, and both think they are astute.”
Historical Volatility Trends
The following analysis examines S&P 500 data since 1928, highlighting daily, weekly, monthly, and annual volatility patterns.
Daily Volatility: The average daily move is 0.76% (absolute value), with major spikes during events like the Great Depression, Black Monday (1987), the 2008 Housing Crash, and the 2020 Coronavirus crash.
Weekly Volatility: Weekly changes amplify daily trends, with some weeks during the Great Depression seeing declines of 18%.
Monthly and Annual Volatility: Monthly and annual data smooth out short-term fluctuations, but major downturns (e.g., 1932, 2008) and recoveries (e.g., post-Great Depression) stand out.
Key Takeaways for Investors
- Trust the Market: The market has historically delivered strong long-term returns. Benchmarking your portfolio against indices can help you maintain perspective and avoid emotional decisions.
- Investing Long is Never Wrong: Long-term investing reduces the impact of short-term volatility. Positive outcomes increase with longer timeframes, making patience a critical factor for success.
In this post, we’ll explain how stock correlation works, why it matters, and how to use it to build a safer, more diversified portfolio.
What is Stock Correlation?
Stock correlation measures how two securities move in relation to each other, with values ranging from -1.0 to +1.0.
- A +1.0 correlation means two stocks move in perfect sync.
- A -1.0 correlation means they move in opposite directions.
- A 0 correlation means no relationship at all.
For example, large-cap stocks like Apple and Microsoft often have a high positive correlation, while stocks and bonds typically have a negative correlation.
Why Does Stock Correlation Matter?
Diversifying your portfolio with uncorrelated assets reduces risk. If all your assets are closely correlated, a downturn in one sector could hurt your entire portfolio.
Holding uncorrelated assets (e.g., stocks, and bonds) can protect your portfolio during market downturns.
As Warren Buffett says,
“Rule No. 1: Never lose money.”
Considering a stock’s correlation helps you follow that rule.
How to Use Stock Correlation in Your Portfolio
Tools like Portfolio Visualizer or Stock Correlation Calculators can help you analyze your portfolio.
Compare examples like Buffett’s stock-heavy portfolio (mildly correlated) vs. Ray Dalio’s portfolio (stocks + gold, less correlated).
The goal? Balance risk and reward by diversifying with uncorrelated assets.
Understanding Risk Management: Hopefully we’ve highlighted the importance of avoiding permanent loss of capital. Remember Warren Buffett’s famous quote about not losing money. Even temporary stock price declines are expected, but the focus should be on preventing irreversible losses.
Diversification: There are 3 primary methods for diversifying an investment portfolio to minimize risks:
- Stocks: Owning a variety of stocks (10-12 for basic diversification) to avoid the risk of any single company going bankrupt.
- Sectors: Ensuring stocks are spread across different sectors to avoid exposure to the same economic factors.
- Asset Classes: Including different asset classes like bonds, real estate, and commodities to further diversify and manage risk.
Avoiding Risky Practices: Stay away from margin trading and options trading, which can lead to permanent capital losses. We also advise caution with cryptocurrencies due to their volatility and lack of underlying cash flows.
Rebalancing: The importance of rebalancing portfolios, such as the 60/40 stock-to-bond ratio, should be considered as it helps maintain desired exposure and manage risk effectively.
Investor Takeaway
Focus on the long term. The market is unpredictable in the short term, driven by momentum and sentiment. But over time, stock prices follow business fundamentals. Companies with strong earnings, cash flow, and growth will recover—and thrive. Think of investing as owning a piece of a business, not just a ticker symbol.
Know the businesses you invest in. When the market drops, fear takes over. If you don’t understand your own companies, you’ll assume the market knows something you don’t. But if you’ve researched, you’ll see these moments as opportunities to buy great businesses at a discount. Track key metrics like revenue, net income, or user growth to stay grounded.
Stick to your plan. Timing the market is impossible. Instead, dollar-cost averages into high-quality companies consistently, regardless of market conditions. As Warren Buffett says, “Be greedy when others are fearful.” Volatility is normal—use it to your advantage.
Here’s the bottom line: The stock market is the only place people run away when things go on sale. Don’t let fear stop you from building wealth. Focus on quality, think long-term, and stay disciplined.
What’s your strategy for handling market volatility? Send me a tweet, I’d love to hear from you!
