Recessions are a part of the economic cycle, occurring with the predictability of market fluctuations over time. Since 1950, the U.S. has weathered 11 recessions, proving time and again that downturns aren’t a question of if but when.
What’s clear from the recent stock market plunge is that investors are uneasy. After a surprisingly strong performance from the S&P 500 in 2024 — which experts hailed as a “very good year” — storm clouds are forming. Trump’s aggressive tariff policies have rattled the markets, and the S&P 500 entered correction territory earlier this month.
Times like these may have long-term investors wondering what they should do to protect their portfolios, and the answer is usually “Do nothing.”
“Generally, the advice boils down to staying invested. But I firmly believe that just saying ‘stay invested’ doesn’t work on days when stocks are in free-fall and the world feels terrible,” said Callie Cox, chief market strategist for Ritholtz Wealth Management, to The Washington Post. “We’re not robots, we’re humans with emotions, and we need to honor that in times like these.”
The truth is reacting to volatility with panic selling is like abandoning ship because you hit a wave. As legendary investor Peter Lynch put it in a September 1995 interview with Worth magazine, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” The key isn’t to predict the next dip; rather it’s about staying in the market long enough to recover.
Watching the portfolio you’ve built for retirement fluctuate can be unsettling, especially when market downturns threaten the very assets you plan to rely on.
However, reacting impulsively, selling and moving your money to the sidelines would not be the best course of action. It’s possible you would miss some of the biggest gains in the market when it eventually recovers. Timing the market is difficult even for the experts.
“Seventy-eight percent of the stock market’s best days have occurred during a bear market or during the first two months of a bull market,” wrote Hartford Funds. “If you missed the market’s 10 best days over the past 30 years, your returns would have been cut in half. And missing the best 30 days would have reduced your returns by an astonishing 83%.”
Rather than pulling everything out and hiding it under your mattress, a more strategic response is to spread your investments across different asset classes and sectors. Diversification doesn’t eliminate risk — nothing truly does — but it helps soften the blow when certain sectors tank.
For instance, as the U.S. market underperforms regions like China and Europe, investors have been advised to buy up international assets to achieve geographical diversification. Vanguard says that at least 20% of your overall portfolio should be invested in international stocks and bonds. Diversification isn’t just about protecting your portfolio – it’s about building resilience. That’s why holding investments beyond the S&P 500 can act as a good cushion when the economy hits a rough patch.
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As you near retirement, market volatility and ongoing inflation can make the road ahead feel especially precarious.
But reacting to short-term turbulence with long-term portfolio changes can be a costly misstep.
According to Fidelity, missing just the market’s 10 best days over the past 40 years has historically reduced wealth by as much as 54% — a costly outcome for a moment of panic.
That said, shifting your asset mix slightly may be a wise move. Make sure your asset allocation fits your investment horizon. Financial experts recommend maintaining some exposure to cash and high-quality bonds — without going overboard on caution.
Christine Benz, director of personal finance and retirement planning at Morningstar, told The Post that allocating 25% to 30% of your portfolio to short- and intermediate-term bonds is a good approach for those approaching retirement.
But make sure you don’t give up on growth entirely. “Remember that even though retirement is a few years away, that is just the start of retirement,” said Corbin Blackwell, senior manager of financial planning at Betterment, to The Post. “For most people, their money needs to last decades, so don’t lose sight of your real-time horizon.”
One popular rule of thumb says you should subtract your age from 110 to know how much of your portfolio should be in equities.
If you’re not quite at retirement age, you might consider working a little longer than originally planned. Extending your career by even a few years can boost savings, provide more time for your investments to grow, and allow you to delay claiming Social Security — increasing your future benefit.
If you’re unsure of the best path forward, it might be worth speaking with a financial adviser who can help tailor a retirement strategy that fits your goals — and gives you peace of mind as you step into your next chapter.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
