Understanding Market Volatility: What History Teaches Us About Turbulent Times
Market volatility can be unsettling for investors. When headlines scream about market corrections and the VIX spikes, it’s natural to wonder whether you should be making changes to your portfolio. In is May 2025 research paper “Factoring in Volatility: How to stay calm in times of turbulence,” Andrew Berkin, Head of Research at Bridgeway Capital Management, examined over 60 years of market data to understand how volatility affects stocks and what investors should do about it.
What the Author Examined
Berkin analyzed U.S. stock market behavior from July 1963 through early 2025, focusing on how different market segments perform during periods of high versus low volatility. The study looked at two critical questions:
How do stocks perform during volatile periods? The research examined monthly volatility patterns and corresponding returns across the entire market and various market factors.
What happens after volatility spikes? Rather than just looking at same-month performance, Berkin analyzed how markets behave in the month following high volatility episodes.
The analysis covered not only the broad market but also specific investment factors including size (small vs. large caps), value, profitability, momentum, and dividend yield. This comprehensive approach provides a nuanced picture of how different portfolio strategies hold up when markets get choppy.
Key Findings: Volatility’s Predictable Patterns
The research revealed several important patterns about volatility and market returns:
Volatility Spikes Are Sharp but Temporary
The volatility experienced in April 2025—the VIX, a measure of expected volatility, surged from 17 at the start of the year to over 50—represented the fourth highest reading in 60 years, comparable only to Black Monday in 1987, the 2008 financial crisis, and the COVID-19 pandemic onset in 2020.
However, volatility spikes tend to be short-lived, quickly reverting toward normal levels even as markets may remain somewhat elevated for a period.
Markets Fall During High Volatility, Then Recover
The data shows a clear pattern: when volatility is highest, average monthly returns are negative (averaging -1.05%), while calm markets see strong positive returns (averaging 1.92%). But here’s the crucial finding—in the month following high volatility episodes, markets tend to bounce back strongly, with average returns of 1.23%, higher than most other volatility environments.
This pattern held true after the Great Financial Crisis and the COVID-19 pandemic, where sharp initial losses were followed by robust recoveries. And, the pattern continued as from May 2025 through year end the S&P 500 Index returned 24%.
Different Market Segments React Differently
Not all stocks respond to volatility the same way:
Small-cap stocks tend to suffer most during volatility spikes but typically recover much of those losses in the following month.
Value stocks show resilience, performing relatively well regardless of volatility levels.
Quality factors (profitable companies and conservative growth) shine during turbulent times as investors seek safety.
Momentum strategies struggle when volatility disrupts market trends.
High-dividend stocks provide relative safety during market turmoil, with utilities being the only sector that maintained positive returns even during the highest volatility periods.
Short-term reversals work best after high volatility, as beaten-down stocks tend to rebound.
Volatility Is Persistent but Unpredictable
While volatility shows some persistence from month to month (64% correlation), market returns themselves show almost no correlation month-to-month (just 3.5%). This means while elevated volatility may linger, trying to predict which direction the market will move is extremely difficult.
Key Investor Takeaways
Based on these findings, Berkin offered several practical recommendations for investors:
1. Resist the Urge to Panic Sell
The data strongly suggests that selling after a volatility spike often locks in losses right before a potential recovery. The temptation to “do something” during market turmoil can be precisely the wrong move. Markets have historically recovered following high volatility episodes, sometimes quite quickly.
2. Maintain a Disciplined, Systematic Approach
Emotional reactions during volatile periods rarely serve investors well. A predetermined investment strategy that you can stick to through market cycles will serve you better than reactive decisions made in the heat of the moment.
3. Build True Diversification
Diversification isn’t just about owning different asset classes—it’s about utilizing different sources of return. The research shows that factors like value, profitability, and quality tend to hold up well during volatile periods. A portfolio that combines market beta with other factors can provide better risk-adjusted returns and emotional comfort during turbulent times.
4. Consider Absolute Return Strategies
Strategies that are uncorrelated to the market can provide valuable ballast during volatile periods. These investments can help reduce overall portfolio volatility and preserve capital when traditional stock investments are under pressure.
5. Practice Disciplined Rebalancing
When volatility causes some positions to fall more than others, systematic rebalancing can help you buy low and sell high without trying to time the market. This mechanical approach removes emotion from the equation.
6. Build Financial and Emotional Resilience
Perhaps most importantly, construct a portfolio you can live with during inevitable market shocks. If your portfolio allocation causes sleepless nights during a correction, it’s probably not the right allocation for you in the first place.
The Bottom Line
Volatility is not an aberration—it’s a fundamental feature of equity markets and the reason stocks command a premium return over safer investments. The key is understanding that while high volatility often accompanies short-term pain, it has historically been followed by recovery.
The current market turbulence may be unsettling, but six decades of data suggests that staying the course with a well-diversified, factor-based approach is likely to serve long-term investors better than making dramatic changes in response to market swings.
As Berkin’s research demonstrates, the worst time to abandon your investment strategy is often when it feels most uncomfortable to stick with it.
Larry Swedroe is the author or co-author of 18 books on investing, including his latest Enrich Your Future. He is also a consultant to RIAs as an educator on investment strategies. This article is for informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice.