The first couple of months of 2025 have seen some volatility in the stock market and frequent headlines related to tariffs, inflation, policy changes, and geopolitical issues around the globe.
“Should I be worried?” is a question on the minds of many investors this week.
While market volatility and media headlines may tempt investors to make irrational and costly moves in their portfolio, I’d like to suggest that now could be a great time to ask three questions that could help you worry less and avoid making an abrupt (and potentially costly) investment changes to your investment strategy.
Question #1: What is the probability that your financial plan would succeed if a 20% drop in the market occurred?
While past performance can’t guarantee the future, many of our clients find it reassuring when they stress test their financial plan to see how an immediate 20% or 30% drop in the market impacts their plan’s probability of success, especially when the likelihood of success remains high.
If you’re a client of One Life Financial Group Inc. and want to stress test your plan, click here for instructions on how to stress test your plan.
Question #2: What does history have to suggest about market corrections and fears that might result from the next apocalypse du jour the media is reporting on?
The media is currently talking a lot about tariffs, inflation, and how they could cause a market crash, which can tempt investors to panic, overreact, and make impulsive investment decisions.
However, the media often doesn’t focus on how difficult it can be to time the market and decide when to get back into it. For example, check out how costly it could be to miss just 1-5 of the best market days during the year!
The media doesn’t always share the potential bright side of a story, as they want you to stay glued to the screen – reading the next headline about how the world will come to an end. For example, you might not find articles that talk about:
-
- Several periods when market performance has been positive during higher periods of inflation
- Investors who own value stocks tend to outperform investors who own growth stocks during periods of inflation
- There have been recent periods in history when the US placed tariffs on China. Despite all this uncertainty during those periods, “both China and the US posted higher cumulative returns than the MSCI World ex USA Index over the four years of Trump’s term.”
Question #3: Do I have adequate emergency reserves (e.g., 3 -6 months of spending) to help you survive a financial storm?
If you answered yes to the above question, you might feel financially secure knowing that you have options to access cash when the stock market is down. For example, let’s assume you lose your job or need two months of living expenses from your emergency reserve account (which holds 6 months of spending needs). In this scenario, you don’t need to sell your stock investments if the market is trading at lower levels.
However, consider developing an emergency reserve plan if you don’t have 3-6 months of reserves available. You could fund your reserve goals using FDIC insurance banking products such as high-yield savings accounts, CDs, and money market accounts. Uncle Sam will gladly tax you on your taxable interest if you’re in a high tax bracket. Other sources of funds investors could access in an emergency could be HELOC (Home Equity Line of Credit), cash, brokerage accounts, etc. However, investment products are not guaranteed and may lose value.
While the media may want you to feel like “this time it’s different,” it is essential to remember that volatility and market corrections are a normal part of investing.
“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffet
Reacting emotionally to volatile markets may be more detrimental to portfolio performance than the drawdown itself. Click here to read more about how costly market timing can be or here if you’re interested in diving into a one-hour video that Dimensional put together on tariffs with expert professor – Douglas Irwin.
Are you still feeling a little bit nervous about the recent headlines and looking for potential strategies that could help calm your nerves?
Below are a few other ideas that have helped investors calm the nerves that headlines have rattled:
- Instead of just looking at your account balance, look at how many shares you own. The number of shares you own has not dropped unless you sell your shares.
- Instead of looking at only your account balance, look at how many shares you are purchasing (if you’re systematically saving into a brokerage account or company retirement plan). Do you ever purchase holiday lights after Christmas or candy after Halloween? Investing can be similar during a market drop. If you buy shares in a declining stock market (when prices are down), you’re acquiring more than you could have purchased before the stock market decline started, just like buying holiday décor after a holiday!
- Here’s a fun one. Imagine how many years you have left to live — is it 20, 30, or 40 years? Go back to the same number of years and see where the S&P 500 was trading. You will likely notice that there were many market drops the S&P 500 had before it arrived at its value today (which doesn’t count dividends that would have been invested!).
CLICK HERE to check out historical prices of the S&P 500
- Take a long-term view for your long-term money. Investing in equities may reward long-term and patient investors. Click here to read more about how adopting a long-term perspective can help change how investors view market volatility and help you look beyond the headlines.
- Be wary of market-timing strategies. Even professional investors have difficulty beating the market! Over the last twenty years, 77% of equity funds and 92% of fixed-income funds failed to survive and outperform their benchmarks after costs (source). If you are trying to time the market, you have to guess right twice—when to get out and when to get back in.
If you’re still worried, don’t hesitate to pick up the phone to call your advisor or to schedule an initial consult with One Life if you would like to create a plan that can help you secure your future, even during difficult times. Our 90-minute consultation is always at no cost to you!