After Thursday’s drop in the indexes, it’s hard not to panic—but it’s crucial to focus on the long term. Someone asked me if it was the biggest drop in history; it wasn’t. For the S&P 500, this drop ranks as the 18th worst.
There’s a lot of noise and uncertainty out there, two things that markets dislike. Markets tend to react more negatively to uncertainty than to outright bad news.
Market Context
Back in December, the indexes hit historical highs. Price-to-earnings (P/E) ratios were elevated, especially among a handful of large companies whose size and strong performance heavily influenced the index. Many stocks were priced high, and plenty of investors were sitting on substantial gains. Naturally, some decided it was time to take profits and wait for better opportunities to reinvest.
It’s also worth noting that market corrections—defined as a drop of 10% or more—occur, on average, every 13 to 14 months. The last one had been in 2022—about 30 before ago. So yes, perhaps a correction was overdue.
A bear market territory is defined as down 20% from a market high and occurs on average about every 4 years.
The S&P 500 hit its historical high during the day on February 19 and on March 13 hit -10% before coming back, as of the close on Friday, the S&P500 is currently between 17% and 18% off its high, close to what is considered bear market territory. The previous bear market was in 2022.
Investment Strategies During Volatility
Many have asked if they should stop their 401(k) payroll deductions and systematic investing until things calm down. The advice here is to continue your investment plan, or even consider increasing your contributions. Lower prices can present good buying opportunities when investing new money. Dollar cost averaging (DCA) is a strategy where you invest a fixed amount at regular intervals regardless of the asset’s price, reducing the impact of market volatility over time.
Who gets hurt in declining markets?
In my experience, two groups of investors:
Those who panic and sell at low points, then wait to reinvest until the market feels “safe.” Unfortunately, they often capture the downside but miss much of the recovery—repeatedly buying high and selling low.
Those whose asset allocation doesn’t match their cash flow needs. If you don’t have enough in cash or bonds to cover current and near-term expenses, you're forced to sell long-term investments at bad times.
Historically, a diversified stock portfolio has delivered returns pretty close to historical averages over 10- and 15-year rolling periods. Stocks are essential to outpace inflation over the long term. But in the short term, they are unpredictable—sometimes far above or below the historical average. This short-term volatility is the price we pay for long-term growth. Relying on stocks for short-term income and cash needs is a recipe for trouble.
That said, being too conservative can hurt as well. If you're entirely in cash or bonds, your portfolio may not keep up with inflation—unless you have a very large principal to draw from.
What Should You Do, Now?
If you're panicking, consider speaking with someone who remains calm during market fluctuations—your financial planner, investment advisor, or even a trusted acquaintance who has weathered similar events.
If you’re in the second group and don’t have enough cash and bonds to cover your immediate needs during a downturn and recovery, first evaluate whether you can temporarily reduce or defer the spending that necessitates current withdrawals. Then, work with a financial planner or investment advisor to develop a strategy to gradually rebalance your portfolio over the coming months or year, so that your asset mix better matches you current and future withdrawal needs. It doesn’t need to be an overnight fix—start implementing the plan gradually.
When we are in these reoccurring corrections and bear markets, we always feel it's different, or worse, this time. Although the causes and timing of these events can look different each time, the ups and downs of the market have always been with us, and will be in the future.
Stay steady. Stay focused. The long-term plan is what matters. As a financial planner and investment planner, the plans I develop with my clients expect to have markets like we are experiencing and factor them into the plans.
1-Dollar cost averaging will not guarantee a profit or protect you from loss, but may reduce your average cost per share in a fluctuating market.
2-The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.
3- Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.