Navigating Stock Market Downturns: Strategies for Calming Your Financial Stress
Rewritten Article:
Your investment portfolio, whether it's a 401(k), IRA, or brokerage account, probably took a hit this year due to the recent stock plunge following President Trump's imposition of tariffs.
If you've got some bonds and cash in your portfolio, or if you had a smidgen of exposure to non-US equities, consider yourself lucky. You've likely lost less than you would have otherwise. Now, losing less isn't exactly the same as winning, and your stocks are still down, at least for now.
But having a diversified portfolio can offer a bit of relief during these tumultuous market times. Diversification will, more often than not, reduce your portfolio's risk and volatility.
"This is exactly the lesson young investors should learn for the next few decades," said Brian Kearns, a financial planner. "These market fluctuations are a part of life, they happen again and again. It's just what markets do."
In the short term, the markets will stay on edge. Stocks may bounce back occasionally on any promising news or a trader's hunch that stocks were oversold. For instance, on a typical Monday morning, stocks might quicken their pace temporarily after a rumor circulated that Trump might put a 90-day hold on tariffs.
So, what now? Here's some advice from financial experts:
Diversified portfolios yield results in the long run
Financial markets can't seem to make logical sense of Trump's tariff regime, which is why the impact on stocks in the long run is unpredictable. But the general consensus is that stocks, as they usually do, will bounce back.
Over the long haul, they've consistently provided returns for investors that comfortably surpassed inflation. So it's wise to stick with a diverse mix of investments. A 60/40 portfolio, with 60% in stocks and 40% in fixed-income assets like government and corporate bonds, is a good place to start. Typically, when stocks drop, bonds tend to perform better.
Even though a 60/40 portfolio has experienced some terrible single-year performances (like in 2022), over time, it's offered stability for investors. From 1901 through 2022, the median return of a US-based 60/40 portfolio was 6.4%, and when measured over 10-year rolling periods, it reached 5.81%, according to a study by the Chartered Financial Analyst Institute.
"The stability of the 60/40 portfolio in the US over the past century has been remarkable, mostly due to the market's remarkable resilience and recovery after significant downturns," the authors wrote.
Be cautious of cashing out
If you ever feel like selling your equities when the market's acting erratically, remember that it can be risky for a couple of reasons. First, selling when stocks are down locks in your losses. And if you buy back in after the recovery has begun, you could end up buying those same stocks at a higher price.
Second, keeping the cash may make you too comfortable. Cash doesn't grow nearly as quickly as equities in the long run, and you could lose spending power if inflation spikes, which is expected with Trump's tariffs.
Even if you can get a return that matches or outpaces inflation – say on a certificate of deposit – the taxes you owe on the interest might erase that advantage.
"What is cash doing for you? Is there inflation? Absolutely. So what is your after-tax rate of return?" said CFP Frank Wong, a financial advisor.
Use market dips as buying opportunities
Big stock declines can present long-term buying opportunities. "If you went to the supermarket last month and tuna was $3 for two cans, and now it's $3 for four, what do you do? You buy more cans," Wong said.
But that doesn't mean you should dive into stock indexes blindly during these declines. "Wade in, don't dive," Kearns advised, noting that before the latest slump, stocks were overvalued considering the risk inherent in owning them.
Target-date funds in your 401(k) should manage the risk for you.
Know when you'll need your money
Most people under 50 have a long way to go until retirement, allowing them to invest more heavily in stocks. However, many people over 50 also have a long investment horizon - potentially 15 to 30 years. That's because they typically withdraw only small amounts annually to supplement income from Social Security and any pensions.
That said, for money you'll need within the next five years, it's best to be very conservative. "Whatever you have now, I'd hold," Wong advised. Ideally, you'd keep that money in short-term fixed income and high-yield savings to ensure it keeps pace with inflation.
Raise cash for two years' worth of living expenses in retirement
Retirees and those close to retirement should avoid selling any of their stock holdings during a downturn. Instead, you'll want to have up to two years' worth of cash to cover your living expenses in addition to any fixed income payments you'll get.
If you need to raise that cash immediately, "take from assets that haven't dropped off as much during this period – for example, high-quality bonds," said Christine Benz, a financial analyst at Morningstar. If you're still working, she suggests trying to boost your savings. If you're over 50, you're eligible to make catch-up contributions in your 401(k). And for those over 60, the catch-up contribution limits are even higher.
In conclusion, diversify your investments. If you can, recognize market corrections as buying opportunities. And be cautious about cashing out when the market is down.
Enrichment Data:
Overview of the 60/40 Portfolio:
The 60/40 portfolio is a common investment strategy that allocates 60% of its assets to stocks and 40% to fixed-income assets. This mix aims to balance growth potential with stability and income generation.
Long-Term Performance:
Historically, the 60/40 portfolio has consistently provided a balance between growth through stocks and stability through bonds. This blend typically offers higher returns compared to more conservative portfolios like the 40/60 mix. For instance, the Developed World ex-US 60/40 Portfolio achieved a 30-year compound annual return of 5.65%, although it still carries a higher risk profile due to its substantial equity component.
Performance During Market Downturns:
While the 60/40 portfolio has shown some resilience during market downturns, it still saw drawdowns in significant market drops, such as in the early 2000s and the 2008 financial crisis. Recent years, including 2022, have tested the portfolio with high inflation and interest rate hikes. During times like these, the bond component in the portfolio provides income and helps cushion volatility, although it might not fully protect against equity-driven downturns.
Comparative Performance with the 40/60 Portfolio:
The 40/60 portfolio, which flips the allocation to favor bonds, generally offers more stability and income but less potential for long-term growth compared to the 60/40 mix. During periods of high stock volatility, the 40/60 portfolio has been more resilient, but it usually lags behind the 60/40 portfolio in terms of capital appreciation.
Outlook for 2025:
Expert projections for the 60/40 portfolio in 2025 suggest a moderate return of around 4% to 5%, with a better risk-reward balance as interest rates stabilize. However, investors should remember the potential for market volatility and consider diversification to reduce risks. In summary, the long-term performance of the 60/40 portfolio has generally been robust, offering a balance between growth and stability. While it can be affected by market downturns, its diversification benefits help it weather volatility better than less diversified portfolios.
- Christine advised, "If you need to raise cash immediately, take from assets that haven't dropped off as much during this period – for example, high-quality bonds."
- In the enrichment data, it mentions, "The 60/40 portfolio generally offers more potential for long-term growth compared to the 40/60 mix."
- Brian Kearns advised, "Diversification will, more often than not, reduce your portfolio's risk and volatility."
