Navigating Market Volatility (We Planned for This)

If you’re feeling a little anxious about the downturn in the market over the last few days, you’re not alone. Thursday, April 3rd and Friday, April 4th, the U.S. stock market had two of its worst days since the COVID bear market back in 2020. The S&P 500 dropped nearly 11% in just 48 hours. What made it even more frustrating is that the drop was mostly self-inflicted — driven by sweeping tariffs that were announced and set to take effect right away.

Over the years, when the market has taken a dip, I find clients will have reactions like these: “What if we’re headed for another Great Depression like the 1930s, or a financial crisis like 2008? What would that mean for me? And what if I’m nearing retirement — or already there? What should I be doing right now?”

It May Feel Different, But We Continue to Stay the Course

If you look back at newsletters past (don’t get our newsletter? subscribe below) you’ll see that even in the heady days of a strong market, I urge clients to Stay the Course. I understand that in the face of troubling headlines, it can be more than challenging to steel one’s resolve and NOT make hasty moves with our investments.

When faced with any sort of stress, our first priority is to find our calm. If news coverage is troubling, I invite you to be very intentional with your consumption of it. It is, after all, designed to feed on the human brain’s propensity for negativity. Once we have some calm we can have some perspective and are more likely to act logically.

Once we take that proverbial breath, we can step back and look at historical returns of the stock market, which started in the United States in 1792. That’s over 230 years of data. Taking the long view, we can see that markets have recovered 100% of the time, including after the Great Depression. However, the timing of that recovery for an individual investor depends on the diversification and risk level of your portfolio.

Do I think we are heading into another Great Depression? No. But for kicks, and because, like the Stoics say, sometimes it helps allay our fears to contemplate the worst-case scenario. During the market crash of 1929 and the Great Depression that followed, an investor with 100 percent of their portfolio in U.S. stocks would have waited about 25 years just to break even. That sounds scary, I know, but investors with more diversified portfolios fared much better.

For example, someone with a 60/40 mix of stocks and bonds would have recovered in about 5 years, thanks to the stability that bonds provided during the downturn. And an investor with a portfolio with a aggressive diversified allocation, spread across asset classes like cash, international stocks, real estate, domestic equities, and gold, would have seen a full recovery in around 8 years.

Keep in mind, this was the most extreme financial crisis of the past century.

One of the key advantages we have today compared to the 1920s and 30s is the presence of a strong Federal Reserve with the ability to manage monetary policy. If the economy starts to stumble, the Fed can step in by lowering interest rates and injecting liquidity into the system. This kind of action often has a powerful, positive effect on the stock market.

To put things in perspective, let’s look at the growth of $1 invested in various forms, from 1926-2024. Even with the staggering drop after the stock market crash and the Great Depression, we still see a trend upward relatively quickly, and certainly over a longer period of time.

Capital Markets Have Rewarded Long-Term Investors: Monthly growth of wealth ($1), 1926-2024

In 2008, we faced the Great Recession and a full-blown financial crisis. The global banking system was on the brink of collapse, and U.S. stocks dropped roughly 55 percent from peak to trough. If you were invested solely in the S&P 500, it took about six years to recover on an inflation-adjusted basis. However, a well-balanced 60/40 portfolio recovered in about two years, especially if you were rebalancing semiannually.

Then in 2020, as the COVID-19 pandemic spread rapidly across the globe, the market dropped around 35 percent in just a few weeks during February and March. But the recovery was just as swift. If you blinked, you might have missed it as the market bounced back in about six months.

The last bear market we experienced was in 2022, and it was a tough one. What made it especially painful was that nearly everything sold off at the same time. The Federal Reserve had kept interest rates too low for too long, and the government had pumped a lot of money into the economy during the pandemic. That combination led to a sharp spike in inflation, just as rates were sitting at rock-bottom levels. When the Fed finally started raising rates, both stocks and bonds took a hit together.

The difference today is that interest rates are now around 4.3 percent, which gives the Fed significantly more room to lower them if the economy goes off the rails.

It Pays to be Ready to Buy When the Market is Down

Another important point to keep in mind is that investors who were able to buy into the market during major downturns were often richly rewarded. Of course, this is much easier said than done. In the moment, most people understandably freeze up, avoid looking at their statements, or simply do not have extra capital available to invest. But the worst move an investor can make is to panic and sell, locking in those losses for good.

Note – have you made the maximum contribution for 2024 to your IRA? Now might be the time to do that before the April 15 deadline. And you might want to go ahead and get some or all of your 2025 contributions now or soon to take advantage of the upside when the market recovers.

We Planned for This

Ultimately, the reason why our clients can remain calm in the face of market turbulence is because that volatility we see, the market drops — we ALREADY planned for that. We go into financial planning knowing that we may need to make adjustments to spending and goals along the way, but our investment strategy remains. We planned for a downturn, we are ready to weather it, and ready to take advantage of the recovery when it comes.

Have questions, or want to see if working with us is for you? We are here when you’re ready.