Every so often, we get a crisis in the stock market. U.S. stock indexes dropped significantly in 2020 because of the COVID-19 pandemic and again in 2023 when the Federal Reserve started raising interest rates. Now we have tariffs.
Time will tell how this shakes out, but if we look back, there are some lessons in history worth reviewing.
Stock market lessons
The U.S. stock market has been incredibly resilient. Whether it’s a weather disaster, terrorist attack, war, pandemic or some other crisis, we have survived.
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Not only that, but if you look at the returns of the U.S. stock market following past stock market declines, the next 12 months were mostly more favorable — but only if you stayed fully invested.
Studies have shown that if you miss just a few of the big up days in the market, then your return could be significantly less.
The real risk
When stocks drop precipitously in just a few days, that can be nerve-racking. It’s the uncertainty that the stock market fears. But market volatility can be rewarding, as stocks have historically returned more than bonds and cash.
And you may need that reward to outpace the real risks to your portfolio, namely inflation and taxes. Inflation and taxes are like the silent killers to portfolios over time, slowly eroding your ability to maintain your standard of living.
And that’s why you may need stocks, because going back to 1926, stocks have historically provided the best performance when taking into account inflation and taxes.
What to do?
In the past, staying diversified has helped. A diversified portfolio can be a mix of U.S. and international stocks, bonds, gold, real estate, private investments and other investments depending on the individual investor’s risk tolerance.
If you’re a baseball manager, would you put all your players at shortstop? No, you would sprinkle them around the field to increase the odds of them catching a ball. Same thing with investing: Sprinkle the money around to catch different markets.
Having guarantees has helped my clients. When everything is failing around you, it’s then that you appreciate guarantees.
Annuities can offer guarantees. Whole life insurance has a guaranteed cash value. Structured notes offer some guarantees. Guarantees are like owning a car warranty: You never appreciate it till the thing breaks.
What not to do?
Panic. Making rash decisions can lead to doing something you will regret 12 months later. Give yourself time and space to reflect. When do you need the money? Do you need all of it at once?
Remain calm, speak to your financial adviser, evaluate your situation, then make thoughtful adjustments if need be.
Final thoughts
Times like this can be frustrating. Especially if you just put money into the stock market. But before you beat yourself up too much, review the past lessons above. The U.S. stock market has been incredibly resilient over time, and time tends to heal most wounds.
You can also use this experience as a warning sign — how can you prepare for the next major stock market selloff? Having a cash reserve or building a more diversified portfolio can help.
Having some guarantees or protections can also help. It’s like the adage “fool me once, shame on you; fool me twice, shame on me.”
Never let a good crisis go to waste — use it to build a more resilient portfolio for next time.
For more information on building a more resilient portfolio, please email the author, Michael Aloi at [email protected].
Investment advisory and financial planning services are offered through Summit Financial LLC, a SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Summit is not responsible for hyperlinks and any external referenced information found in this article.