Markets, especially Canadian markets, took a tumble through September. The S&P/TSX was down 11.2% from September 3rd to October 15th, prompting Canadian news headlines like Forty-Day Freefall, and Market mayhem: what’s driving the global economic breakdown. Market volatility is not a new thing, but the media is adept at using a downturn to prey on jittery investors.

A relatively normal drop in prices can seem like the beginning of an apocalyptic event when it is not taken in context.

In the period from October 20th 2011 to October 20th 2014, there have been four instances where the market dropped more than 7% over time periods shorter than 40 days. Over this same time period, the market has managed to climb 18.67%; this means that every drop was eventually followed by an increase of greater magnitude. This is not an argument for the safety of the market – volatility will happen, and there will be serious market corrections. This is an argument for staying invested.

During each of the down periods from October 20, 2011 to October 20, 2014, nobody could have consistently predicted which way the market was going to go the next day. The investors that stayed invested were able to partake in the gains that followed the drops, and the investors that capitulated were stuck on the sidelines while the markets increased in value.

Market volatility is the price that investors pay to capture the equity premium, and understanding this cost is a necessary part of being an equity investor.