Every so often, we get a crisis in the stock market. U.S. stock indexes dropped significantly in 2020 because of the COVID-19 pandemic and again in 2023 when the Federal Reserve started raising interest rates. Now we have tariffs.
Time will tell how this shakes out, but if we look back, there are some lessons in history worth reviewing.
Stock market lessons
The U.S. stock market has been incredibly resilient. Whether it’s a weather disaster, terrorist attack, war, pandemic or some other crisis, we have survived.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Not only that, but if you look at the returns of the U.S. stock market following past stock market declines, the next 12 months were mostly more favorable — but only if you stayed fully invested.
Studies have shown that if you miss just a few of the big up days in the market, then your return could be significantly less.
The real risk
When stocks drop precipitously in just a few days, that can be nerve-racking. It’s the uncertainty that the stock market fears. But market volatility can be rewarding, as stocks have historically returned more than bonds and cash.
And you may need that reward to outpace the real risks to your portfolio, namely inflation and taxes. Inflation and taxes are like the silent killers to portfolios over time, slowly eroding your ability to maintain your standard of living.
And that’s why you may need stocks, because going back to 1926, stocks have historically provided the best performance when taking into account inflation and taxes.
What to do?
In the past, staying diversified has helped. A diversified portfolio can be a mix of U.S. and international stocks, bonds, gold, real estate, private investments and other investments depending on the individual investor’s risk tolerance.
If you’re a baseball manager, would you put all your players at shortstop? No, you would sprinkle them around the field to increase the odds of them catching a ball. Same thing with investing: Sprinkle the money around to catch different markets.
Having guarantees has helped my clients. When everything is failing around you, it’s then that you appreciate guarantees.
Annuities can offer guarantees. Whole life insurance has a guaranteed cash value. Structured notes offer some guarantees. Guarantees are like owning a car warranty: You never appreciate it till the thing breaks.
What not to do?
Panic. Making rash decisions can lead to doing something you will regret 12 months later. Give yourself time and space to reflect. When do you need the money? Do you need all of it at once?
Remain calm, speak to your financial adviser, evaluate your situation, then make thoughtful adjustments if need be.
Final thoughts
Times like this can be frustrating. Especially if you just put money into the stock market. But before you beat yourself up too much, review the past lessons above. The U.S. stock market has been incredibly resilient over time, and time tends to heal most wounds.
You can also use this experience as a warning sign — how can you prepare for the next major stock market selloff? Having a cash reserve or building a more diversified portfolio can help.
Having some guarantees or protections can also help. It’s like the adage “fool me once, shame on you; fool me twice, shame on me.”
Never let a good crisis go to waste — use it to build a more resilient portfolio for next time.
For more information on building a more resilient portfolio, please email the author, Michael Aloi at maloi@sfr1.com.
Investment advisory and financial planning services are offered through Summit Financial LLC, a SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Summit is not responsible for hyperlinks and any external referenced information found in this article.
Related Content
- Stick to the Plan: Don't Panic During Economic Uncertainty
- During Market Volatility, Avoid These Common Investing Pitfalls
- Three Keys to Logical Investing When Markets Are Volatile
- Market Volatility Tempting You to Get Out? Read This First
- Four Historical Patterns in the Markets for Investors to Know
-
Best Home Rental Websites and Apps 2025The best home rental websites and apps, such as Rent.com, Apartment Guide, Airbnb and Vrbo, can make finding a home or vacation rental a whole lot easier.
-
Stock Market Today: Markets Chop Up More Trump ThreatsStocks are grinding to new highs on light summer volume, and bitcoin is only getting bigger.
-
Stock Market Today: Markets Chop Up More Trump Threats
Stocks are grinding to new highs on light summer volume, and bitcoin is only getting bigger.
-
If You'd Put $1,000 Into Procter & Gamble Stock 20 Years Ago, Here's What You'd Have TodayProcter & Gamble stock is a dependable dividend grower, but a disappointing long-term holding.
-
2026 Social Security COLA: The Little Known Data Shift That Could Impact Millions of Retirees' BenefitsThe BLS has changed how it measures the inflationary data that determines whether Social Security benefits will get a Cost-of-Living Adjustment (COLA). Will it hurt your benefits?
-
Financial Pros Provide a Beginner's Guide to Building Wealth in 10 YearsBuilding wealth over 10 years requires understanding your current financial situation, budgeting effectively, eliminating high-interest debt and increasing both your income and financial literacy.
-
The Delightful Way to Protect Your Cognitive HealthYou know the drill — protect your cognitive health by eating well, exercising and socializing. But this newfound way to boost brain health is pure pleasure.
-
Five Mistakes to Avoid in Your First Year of RetirementRetirement brings the freedom to choose how to spend your money and time. But choices made in the initial rush of excitement could create problems in future.
-
I'm an Investing Expert: This Is How You Can Invest Like Warren BuffettBuffett just invested $15 billion in oil and gas, and you can leverage the same strategy in your IRA to potentially generate 8% to 12% quarterly cash flow while taking advantage of tax benefits that are unavailable in any other investment class.
-
Integrity, Generosity and Wealth: A Faith-Based Approach to BusinessEntrepreneurs who align their business and financial decisions with the biblical principles of integrity, generosity and helping others can realize impactful and fulfilling success.
