Before putting money into markets, it helps to understand what kind of game you are entering. Not the details of products or strategies, but the basic rules of how markets behave over time.
These are not predictions. They are patterns that have held across decades and across countries. They do not guarantee anything about the future, but they set reasonable expectations for what the journey looks like.
This is general educational information, not personal financial advice.
Rule 1: Markets Go Down (Sometimes a Lot)#
This is the first thing to accept, and the hardest. Markets fall. Sometimes sharply. Sometimes for extended periods.
A decline of 10% or more happens, on average, about once a year. A decline of 20% or more (often called a bear market) happens roughly every three to four years. Declines of 30% or more are rarer, but they happen too.¹
These are not signs that something is broken. They are part of how markets work. The possibility of loss is not a bug in the system. It is the reason returns exist in the first place. If there were no risk, there would be no reward.
The discomfort of watching balances fall is real. But the historical pattern is clear: markets have recovered from every major decline, eventually. The 2008 financial crisis saw a 56% drop; recovery took about four and a half years. The COVID crash of 2020 saw a 34% drop; recovery took about five months.¹
Knowing this does not make declines painless. But it does make them less surprising.
Rule 2: Time Horizon Changes Everything#
Volatility looks very different depending on how long you plan to stay invested.
Over a single year, markets can move dramatically in either direction. There have been calendar years with gains over 30%, and calendar years with losses just as severe. In the short term, anything can happen.
Over longer periods, the range of outcomes narrows. Looking at rolling ten-year periods historically, positive returns become much more common. Looking at twenty-year periods, negative outcomes become rare.
This does not mean long-term investing is safe. It means the probabilities shift. Someone investing for one year is playing a different game than someone investing for twenty.
The practical implication is that money you may need soon does not belong in volatile assets. Not because those assets are bad, but because the timing mismatch creates risk that has nothing to do with the investment itself.
Rule 3: Predictions Are Mostly Noise#
Markets are full of people making predictions. Economic forecasts. Analyst targets. Expert opinions. Headlines announcing what will happen next.
Most of these predictions are wrong. Not because the people making them are dishonest, but because markets are complex systems influenced by countless variables, many of which are unpredictable.
Research consistently shows that even professional forecasters struggle to outperform simple baseline models. The predictions that get attention are often the dramatic ones, which are usually the least likely to be correct.
This does not mean analysis is useless. Understanding how things work is different from predicting what will happen. But it does mean that confidence in forecasts should be low, and that plans built around specific predictions are fragile.
Rule 4: Process Beats Outcomes (In the Long Run)#
A good decision can lead to a bad outcome. A bad decision can lead to a good outcome. In the short term, luck dominates.
Over time, the quality of the process starts to matter more. Someone who makes consistently reasonable decisions, based on sound principles, will tend to outperform someone who swings between fear and greed, even if the latter occasionally gets lucky.
This is why experienced investors focus on building systems rather than chasing results. Rules for when to buy, when to sell, how much to allocate. The rules may not be perfect, but they remove the need to make high-stakes decisions in moments of stress.
The goal is not to be right every time. It is to be right enough, often enough, over a long enough period.
Rule 5: Narratives Are Seductive and Usually Wrong#
Markets generate stories. Explanations for why things moved. Theories about what comes next. These narratives are compelling because they make a chaotic system feel understandable.
But most market narratives are constructed after the fact. They explain what already happened, then project forward as though the future will follow the same script. It rarely does.
The same data can support multiple narratives. A market rise can be explained as "justified optimism" or "unsustainable bubble" depending on who is telling the story. The narrative chosen often reflects the teller's prior beliefs more than any objective analysis.
This does not mean ignoring information. It means holding it loosely. Treating stories as possibilities, not certainties. And being especially wary of narratives that make you feel confident about the future.
A Simple Self-Check#
Before proceeding further into investing, it is worth pausing to confirm you understand what you are entering.
Ask yourself:
- Do I accept that markets can fall 20% or more, and that this is normal, not a signal to panic?
- Is my time horizon long enough to ride out extended downturns without needing to sell?
- Am I prepared to follow a process rather than react to headlines?
- Can I resist the urge to act on predictions, mine or others?
If the answer to any of these is uncertain, that is not a failure. It is useful information. It may mean spending more time on the foundational material before making decisions that require patience you do not yet have.
Summary#
Markets follow patterns that are uncomfortable but predictable: they fall regularly, sometimes severely; they recover, usually eventually. Time horizon determines whether volatility is a problem or a feature. Predictions are unreliable, narratives are seductive, and outcomes in the short term are dominated by luck. The edge, if there is one, comes from process: a set of principles held through uncertainty, rather than reactions to events. Understanding these rules does not make investing easy. But it sets expectations that match reality, which is where durable results come from.
Sources#
- Invesco. (2024). Historical analysis of S&P 500 drawdowns and recovery periods. https://www.invesco.com/us/en/insights/investors-stock-market-corrections.html (Accessed January 2026)