NEW YORK — With financial markets experiencing dramatic fluctuations lately, many investors feel compelled to take action to safeguard their retirement funds. However, historical data suggests maintaining composure typically yields better results.
America’s stock exchanges have consistently bounced back from every significant decline they’ve experienced. From global economic crises to trade disputes and military conflicts, the S&P 500 has repeatedly recovered its losses and reached new heights. While this process can span several years, those who shifted their retirement account investments away from equities often missed subsequent recoveries and additional profits.
Could this pattern repeat itself? Nobody can guarantee it, and certain factors differ this time. However, numerous investment professionals and market analysts continue offering their standard guidance: provided it’s capital you won’t need immediately — which shouldn’t be invested in stocks anyway — attempt to remain patient and weather the market’s turbulence, despite the difficulty.
This same advice was given following President Donald Trump’s announcement of global tariffs on “Liberation Day” last year, when inflation surged in 2021, and when COVID devastated the worldwide economy in 2020. Enduring these types of disruptions represents the cost of accessing the larger returns stocks can provide over extended periods.
“Although volatility may feel uncomfortable, could rise from here, and possibly cause a near-term drawdown in stocks, volatility in itself tends to be brief when it reaches more extreme levels,” stated Anthony Saglimbene, chief market strategist at Ameriprise. “And, more often than not, the extreme volatility provides investors with a solid long-term entry point to buy stocks rather than sell.”
The conflict in Iran has disrupted global oil distribution and triggered severe market fluctuations.
The hostilities have stopped most shipping through the Strait of Hormuz, a narrow passage along Iran’s coastline where approximately 20% of worldwide oil typically travels daily. This has caused regional crude storage facilities to reach capacity with nowhere to send the oil. Consequently, oil companies are announcing production cuts.
Crude prices briefly jumped to nearly $120 per barrel on Monday, reaching levels not seen since summer 2022, amid concerns the supply issues could persist. Some market watchers predict prices might quickly hit $150 if the strait stays blocked.
Extended periods of elevated oil costs could create a worst-case economic situation known as “stagflation.” This term describes when economic growth stalls while inflation stays elevated. It’s a devastating combination that the Federal Reserve and global central banks lack effective tools to address.
As of Thursday morning, the S&P 500 sits just 4% beneath its record high established in January. The situation feels worse due to the sharp price movements occurring recently, sometimes changing hour by hour as well as daily.
Multiple times since the Iran conflict began, the Dow Jones Industrial Average has dropped approximately 900 points during morning trading only to eliminate those losses later the same day or come very close.
While U.S. equity markets don’t frequently behave exactly this way, they have a consistent pattern of experiencing steep declines before climbing again.
The S&P 500 typically sees drops of at least 10% annually. These declines occur frequently enough that investment professionals have labeled them “corrections.” Experts often view these as eliminations of excessive optimism that might otherwise push stock values too high.
Moving your equities or shifting retirement investments from stocks to bonds might reduce the likelihood of experiencing massive losses. However, exiting the market would also require determining the proper moment to re-enter, unless you’re prepared to forfeit any future recovery and gains.
Correctly timing market movements remains consistently challenging. Some of the strongest trading days in U.S. market history have occurred during downturns.
Just last Monday, anyone who sold when the S&P 500 fell 1.5% during morning hours would have missed the afternoon rally. The index finished with a 0.8% increase.
While some recoveries require more time than others, professionals typically advise against investing money in stocks that you cannot afford to lose for several years, potentially up to a decade. Emergency reserves for expenses like home maintenance or medical costs should never be placed in equities.
Mobile applications have made trading more accessible and affordable than ever before. This has attracted a new wave of investors who may lack experience with such extreme market movements.
Fortunately, younger investors often possess the advantage of time. With decades remaining until retirement, they can weather the fluctuations and allow their equity portfolios to hopefully recover while benefiting from compounding and eventual growth. For them, price drops might represent stocks going on sale.
Older investors have less time for their investments to rebound.
Those already retired might consider reducing spending and withdrawals following sharp market declines, since larger withdrawals eliminate future compounding potential. Even in retirement, some individuals need their investments to last three decades or longer.
You don’t need to monitor any of this closely if you have defined-benefit pensions, which few American workers still receive, as you’re guaranteed specific payments regardless of stock market performance.
When equities decline, Treasury bond and gold prices often increase as investors seek safer options. This explains why many advisors recommend maintaining diversified portfolios to help cushion shocks.
This time, however, Treasury prices have suffered due to concerns about high oil costs and inflation. Gold prices have also occasionally struggled when Treasury bond yields have risen. This occurs because gold, which provides no income to investors, appears less appealing when Treasuries offer higher interest payments.
Nobody has the answer, and don’t believe anyone who claims otherwise.
