Staying Invested Matters
The bear market of 2025 arrived with surprising speed and an abundance of troubling uncertainty linked to the Trump tariff policy. The brutal two-day sell-off on April 3rd and 4th saw the S&P 500 fall 10.5%, the 5th largest two-day decline in modern history. In its wake were shocked investors, rattled global financial markets and, at least for the moment, new detours in many global supply chains. A recession in the US is now a real possibility unless we see a springtime pivot in tariff-related uncertainty or new trade agreements with many of our trading partners. For investors, this is not the time to panic or make rash, impulsive decisions that go against long-term investment plans. Long-term investors know that corrections (or bear markets) are just part of the ebb and flow of the financial markets. They also know that staying in the market greatly improves your chances of avoiding losses – the odds of losing money in the stock market decreases (by holding period) from 1 year (26%), to 5 years (12%), to 10 years (6%) and, lastly, to 15 years (0.2%). During any period of increased selling, it is then that we must maintain a tight focus on our long-term goals. History suggests that the selling will eventually stop, and buyers will once again step in. As investors, it is important to develop a psychological detachment that is present in both bull and bear markets. If you are like me, you probably enjoy checking your stocks during good times and avoid financial markets news during bad ones. That is ok but remember that good investing opportunities often present themselves in the meanest of bear markets.
While the recent plunging stock prices were bad enough, the whipsaw volatility driven by “tariff on and tariff off” news has made the first part of 2025 a disappointing and difficult time for investors. Market volatility is measured by the CBOE Volatility Index or VIX and is more commonly referred to as the “fear gauge.” VIX, one of the most widely watched indices of expected near-term market volatility, is a measure of the cost of buying options on the S&P 500 Index one month in the future. Although the VIX formula includes both puts and calls, it is the increased demand for puts that has a greater impact on the result. A rising VIX signals an increase in put option activity, which often means that institutional investors have become nervous about the stock market and are looking to hedge (protect or insure) their holdings from a broad market decline. Volatility, by itself, is not a risk for long-term investors like political or economic risk or industry or sector risk or even company performance. The 2025 VIX intraday high of 60.13 was seen on April 7th. While unsettling, our recent collective memories remind us that we have seen much worse, for example, the VIX high marks of 89.53 and 85.47 seen, respectively, during the 2008-09 financial crisis and the COVID pandemic in March 2020.
Will the market recover from the April sell-off and the broader 2025 bear market? History suggests Yes. As bad as the two-day April sell-off felt, we saw worse two-day declines in both the 2008-09 financial crisis (5 such declines) and COVID pandemic (2 such declines). In all cases, the forward S&P 500 total returns were nicely positive at the 1-Year, 3-Year and 5-Year marks. In only one case, was the 1-Year total return not large enough to cover the losses suffered in the decline. Investors looking to predict or “time” the market are hereby warned. Selling or getting out of the market during a downturn often means missing out on the accompanying upswing. In fact, missing just the 10 best days in the market over the past 30 years would reduce your returns by over 50%. More to the point is that missing the 30 such best days would have reduced your returns by an astonishing 80%!