When going through uncertain times in the markets, it can feel unprecedented, but a closer look at history shows that we’ve been in similar situations before. Mark Twain is commonly quoted as saying “history doesn’t repeat itself, but it does rhyme.” Though investors have never faced the exact same situation we do today, they have certainly encountered headlines that rhyme with those of the past.
Each time a crisis occurs, it creates fear that this time will be different. And while no two events are exactly the same, that doesn’t mean there isn’t already a precedent for them.
It is quite common for advisors to roll out graphics like the one above as evidence that one shouldn’t panic and bail out of their stock and bond portfolios. But to maintain a disciplined investment approach, it is sometimes not good enough to simply understand that stock and bond prices have always bounced back if given enough time. It can be especially helpful to learn why that has been the case.
Why Do Markets Bounce Back?
Companies with heavy debt burdens, limited cash resources, and expendable products are at risk of bankruptcy during difficult economic conditions. On the flip side, companies in a strong financial position that produce products and services deemed necessary by consumers can not only survive periods of economic turbulence, but they can also thrive as their weaker competitors get washed out.
That doesn’t mean the stock values of these companies won’t decline, but if given enough time, they maintain the ability to adjust their price and cost structures to fit the prevailing economic environment. This is a primary reason that high-quality stocks are often cited as an excellent long-term inflation hedge.
Although quality bonds work differently than stocks, similar logic can be applied. If interest rates rise because of inflation or market turbulence, issuers will be forced to pay bond holders higher rates as the existing bonds mature. As a bond investor, this doesn’t help immediately as you experience temporary declines on paper. Over time, however, you will earn higher interest rates when you reinvest the proceeds received, eventually offsetting those declines. Clearly, shorter-term bonds mature faster and reset to higher rates quicker, but many investors are shocked to learn that even longer-term, 10-year bonds averaged mid-single digit returns during the years of stagflation from 1968-1981.
Why You Shouldn’t Try to Time the Markets
You may be thinking that an even better approach would be to get out of the markets altogether and reinvest when the skies are clearer. But market timing does not amount to avoiding risk; rather, it introduces an entirely different type of risk: the risk that you fail to predict the right point to sell and reinvest the proceeds. Even if you are fortunate to get the timing right once, that isn’t good enough. You will need to make those same decisions successfully, over and over, since history shows that geopolitical turmoil is far from a one-time event.
And even if you are lucky enough to be right most of the time, missing just a few days of strong market returns could put you in a much worse position than if you had done nothing at all. This is the reason many investors have failed to participate fully in the long-term success of the markets and why we do not advocate that approach.
According to research from Franklin Templeton, investors who missed out on the top 10 trading days from 2005-2024 would see their returns reduced by 63%1. And from 1937 to 2024, average returns for the S&P 500 were positive 76% of the time 1.
The key to successful investing is diversification and identifying the appropriate strategy for your situation in advance, rather than attempting to react to market volatility. These concepts are always important, but especially when widely divergent paths, as we are experiencing today, appear possible.
During moments of volatility, it’s key to have a portfolio risk level that matches your risk tolerance to ensure you are not tempted to make decisions based on emotion. No matter what external factors might be affecting market outcomes in the short term, a sound and disciplined long-term strategy is still most likely to generate the best outcome for investors.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no guarantee that asset allocation or diversification will enhance overall returns, outperform a non-diversified portfolio, nor ensure a profit or protect against a loss. Investing involves risk including possible loss of principal.
2025-7181 03/25
