What Recent Market Volatility in 2025 Teaches Us About Risk Tolerance
Navigating the storm: reflecting on three months of market turbulence
What a ride!
At the time of writing, US equities (per the S&P 500 benchmark index) are up around 1.5% year-to-date (YTD), but this masks some dramatic volatility.
After hitting all-time highs on 19th February, the market plunged nearly 19% in six weeks, just avoiding official bear market territory (defined as a -20% correction).
What Triggered the Sell-Off?
Initially, markets were unsettled by fears that AI euphoria had driven tech valuations to unsustainable levels. This was compounded by reports of Chinese firm DeepSeek developing a large language model to rival OpenAI’s ChatGPT, Anthropic’s Claude, and Google’s Gemini, but at a much lower cost. However, the sell-off intensified—considerably so—on Inauguration Day, when US President Donald Trump stunned markets with the announcement of sweeping global tariffs. The scale and suddenness of the measures triggered a sharp downturn across stock markets worldwide.
However, the aforementioned S&P 500 has since rebounded by over 20% after Trump paused many of those tariffs and indicated a willingness to negotiate with China. The so-called 'Trump put' appears restored—the president seemingly responding to market panic after creating it. Or maybe this was his strategy all along—markets have seemingly accepted 10% tariffs globally, five times higher than previous levels – classic 'Art of the Deal' stuff, some might say.
To put some figures to the recent volatility: ignoring currency fluctuations, a £100,000 US investment in mid-February would have dropped to £81,000 within six weeks, before recovering to £97,000 six weeks later. A bear market scare and a bull market bounce, all within a single quarter.
Risk vs Reward
When assessing recent market volatility, it's revealing to examine how different risk profiles have performed.
The chart below shows the YTD performance of the Timeline Classic 40, 60, 80 and 100 model portfolios, a common investment strategy among our clients.
These portfolios align with Risk Levels 4 (low), 6 (medium), 8 (medium-to-high) and 10 (very high), respectively. Generally, the number attached to the model indicates the equity percentage, with the remainder of the portfolio held in bonds, mainly government and high-quality corporate debt.
In simple terms, more equity means more growth potential, but also more short-term ups and downs.
Quite remarkably, as of 16th May 2025, all portfolios have delivered year-to-date returns within 1% of each other, broadly flat to slightly down vs the start of the year. However, this masks a much more turbulent journey for the higher-risk portfolios.
For volatility, our preferred measure is ‘maximum drawdown’ - the percentage decline from peak to trough.
We believe this better indicates risk than standard deviation because it directly reflects your investor experience—how much pain you endured before recovery. It tests whether you'll "stay in your seat" or feel compelled to abandon ship.
While all portfolios have roughly converged at the same endpoint now, the Timeline Classic 100 model was at one point down 16% from its February peak. For the Timeline Classic 40, the drawdown was 'just' 7%.
In that regard, the models performed as they’re designed—lower-risk portfolios fell less; higher-risk ones fell more.
Note, when investing, your capital is at risk. The value of your investment (and any income from it) can go down as well as up, and you may get back less than you invested, particularly where investing for a short timeframe (we usually recommend a horizon of at least 5 years). Neither simulated nor actual past performance is a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
A Timely Moment to Reflect
So where are we going with this?
When recommending an appropriate risk profile, we consider three factors:
Your need to take risk – What returns do you require to achieve your goals?
Your ability to take risk – How well can you absorb market falls, given your wider financial position?
Your willingness to take risk – How comfortable are you with market volatility?
We can reliably assess points 1 and 2—these are mostly objective and determined through cashflow modelling.
However, the third point—your emotional response—is harder to pin down.
Questionnaires are useful, but imperfect. And there’s a big difference between imagining a downturn and actually living through one.
Which makes this an ideal time to ask: how did it feel?
If recent market moves made you anxious—if you were tempted to sell, or your portfolio kept you awake at night—it might be worth revisiting your risk profile. That doesn’t mean abandoning equities altogether. But it may make sense to dial things down slightly: introducing steadier assets like bonds or cash, especially if your goals remain achievable on a lower-risk footing.
Stress tests are useful. But stress rehearsals—where we experience the emotion behind the numbers—are even more valuable.
A Longer-Term Perspective
Of course, it’s equally important not to lose sight of the long game.
While recent returns have converged, the chart below shows how the same portfolios have performed over the last 5½ years—roughly since the Timeline models were launched.
On an annualised basis:
Timeline Classic 100: 8.8% per year
Timeline Classic 80: 7.5% per year
Timeline Classic 60: 6.0% per year
Timeline Classic 40: 3.9% per year
Each 20% increase in equity exposure has historically delivered around 1.4–1.6% more per year. That may not sound like much, but it compounds to a material difference over time.
As we often say, volatility isn’t a flaw if investing—it’s the feature that drives performance. It’s your admission ticket for superior long-term returns.
If stock and bond markets went up uniformly in a straight line, there’d be no risk, and so, you would expect a cash-like (risk-free) return. Through investing, we’re aiming to do better than that, in which case, some bumps along the road are inevitable.
Summary
Recent market volatility offers a timely opportunity to reflect on your true tolerance for risk. If you found yourself checking your portfolio daily or feeling tempted to sell as markets fell, it may be a sign that your current risk profile isn’t fully aligned with your emotional comfort around volatility.
It’s worth remembering: the costliest mistake in investing isn’t picking the ‘wrong’ fund or paying a slightly higher fee—it’s abandoning your strategy at exactly the wrong moment. The right portfolio isn’t just the one that looks good on paper, but the one you can stick with when things get uncomfortable.
Happy Thursday!
Kind regards,
George
Important Disclaimer
This blog is for general information only and is intended for retail clients. It does not constitute financial or tax advice, nor is it an offer to buy or sell any specific investment. Since I don’t know your personal financial situation, you should not rely on this content as tailored advice. While we aim to provide accurate and up-to-date information, we cannot guarantee that all details remain correct over time. We are not responsible for any losses resulting from actions taken based on this blog’s content.
