Market downturns can be unsettling. Seeing your investment portfolio decline can trigger a natural impulse to want to sell long-term investments until "the coast is clear".
However, history has shown that staying the course during volatile times is a better path towards protecting your long-term financial security from risks you'll face over time.
Downturns Are Very Common
Stock markets have always moved in cycles, with periods of growth followed by inevitable downturns.
While short-term fluctuations can be painful, long-term investors benefit from recognizing that downturns are temporary. Historically, the market has always recovered and eventually gone on to reach new highs (more on how long recoveries typically take below).
Following gains of 20%+ in both 2023 and 2024, the S&P 500 index has declined by about 10% so far in 2025.
As the chart below shows, between 1950 - 2025 the average mid-year market decline for the S&P 500 index has been about 14%.
In spite of very common 10%+ mid-year declines, the S&P 500 index has produced an average annual return of +11% per year since 1950 which far outpaced inflation over the same time period (inflation is a bigger risk over a decades-long retirement).
The chart also shows that many years with declines (labeled "DD" in the chart) of greater than 10% at some point during the year still ended up producing very positive returns for the year as a whole once the recovery arrived.
Jumping In and Out of Markets is Costly
Reacting during periods of market downturns can be costly. Investors who derail their long-term plans and sell during a downturn often miss the market's best recovery days.
Periods of market declines are typically followed by some of the best days which eventually lead to a sustainable recovery, and these best days often occur when least expected with no obvious catalyst at all.
Jumping out of markets during periods of decline with hopes of reinvesting "when the coast is clear" introduces risk of missing the best days, which can cripple long-term returns.
As the image below shows, between 2000-2024 the S&P 500 index has averaged about 9.8% per year.
However, if the 10 best days were missed each year, the return drops from +9.8% per year for those who stayed the course through the ups and downs to -12.5% per year for those who missed the 10 best days each year.
If someone were to sell long-term investments due to short-term market uncertainty, they have to hope markets continue falling past the point where they sold AND hope they're able to buy back in at prices lower than where they sold to profit.
If they aren't able to re-invest at lower prices which requires some luck, they end up stuck in lower yielding investments during strong market recovery periods waiting for another decline to get re-invested, which can take years. This can really harm long-term returns.
Because the best days tend to follow the worst days, and because recoveries usually arrive unpredictably and often with no obvious catalyst at all, staying the course through ups and downs removes the risk that you'll miss out on the strong recovery when it arrives.
And being invested during the strong recovery periods is key to achieving the long-term returns that will protect your money's purchasing power from inflation over time.
How Long Does It Take Markets to Recover?
Below is data for S&P 500 index downturns and recovery periods between 1945-2024:
5% - 10% declines: Declines of between 5% - 10% have occurred 90 times, or more than once per year. On average, it's taken 1.5 months for the market to recover during declines of this size.
10% - 20% declines: Declines of between 10% - 20% have occurred 29 times, or about once every 2.7 years. On average, it's taken 4 months for the market to recover during declines of this size.
20%+ declines: Declines of greater than 20% have occurred 13 times, or about once every 6 years. On average, it's taken 2 years for the market to recover during declines of this size.
In spite of declines being a normal part of investing, the S&P 500 index has averaged about 10% per year since the 1920s which more than tripled the rate of inflation during the same time period.
How to Protect From Selling During Bad Times?
Especially for those approaching or already in retirement, a sound investment plan should focus simultaneously on building protection from short-term market fluctuations AND protecting your purchasing power from inflation in the years and decades ahead.
While stock funds have produced long-term returns that far outpace inflation, they do experience temporary declines in value from time to time.
To protect yourself from needing to sell stock funds in times of market declines, it's important to incorporate stable investments like money market funds, high yield savings accounts, CDs, and bonds into your plan that hold steady in times of market declines.
By keeping several years of distributions needed to supplement social security, pensions, and other income sources in stable investments, the risk of needing to sell stock funds during periods of market declines can be minimized significantly.
Determining an appropriate to keep in stable investments for your specific situation is done by builidng a retirement cash flow worksheet which is discussed more here: Retirement Cash Flow Worksheet
Conclusion
Market downturns are inevitable and uncomfortable while they're occurring, but they're also temporary.
Every single time markets have fallen in the past, they've eventually recovered and continued onto new highs. And those that stayed the course and stuck with their plan during uncertain times have been rewarded.
By maintaining a long-term perspective, resisting short-term decision-making, and sticking with your plan especially through inevitable down periods, you can prevent temporary downturns from derailing your long-term plan.
Staying calm and patient during turbulent times, both up to and during your retirement, combined with having a good plan before a downturn occurs will help protect your long-term financial security regardless of what markets do in the short-term.
Want To Discuss This Individually?
1 - For clients: Call or email me any time as always.
2 - For non-clients: Complete the form on the website to request a retirement planning consultation: www.rolekretirement.com
This is article is for informational purposes only and should not be considered as tax or legal advice. Advice is only provided after entering into an Advisory Agreement with the Advisor. See other disclosure here: Disclosures
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