Uncertainty is the only certainty in the stock market. Nobody knows what will trigger a crash or when it might happen. With President-elect Donald J. Trump’s policy agenda—stiff tariffs, deep federal spending cuts, and mass deportations—some investors are nervous about their portfolios. Should you be worried? History offers lessons.
Lessons from 2020: Panic Doesn’t Pay
When the pandemic hit in early 2020, the S&P 500 plunged 34% in just over a month. Many investors panicked. Vanguard studied its retail investors during this period and found that fewer than 1% abandoned stocks for cash. Yet, those who did faced significant losses. Of those who sold:
- 86% earned lower returns over the next three months than if they had stayed invested.
- They missed the S&P 500’s subsequent 36% rebound by May 2020.
By the end of 2020, the market gained 16%, soaring another 25% in 2021. Investors who sold during the panic often waited too long to re-enter, missing critical recovery periods.
Real-World Examples: The Cost of Fear
Consider three hypothetical retirees with identical $500,000 portfolios (60% stocks, 40% bonds) during the pandemic:
- Investor 1 stayed invested: Portfolio grew to $741,670 by October 2024.
- Investor 2 sold during the crash and stayed in cash: Portfolio fell to $471,514.
- Investor 3 sold but reinvested in late May 2020: Portfolio recovered to $625,843.
The lesson? Panic-selling can cost you dearly, while staying the course often pays off.
Strategies to Stay Steady
If you’re concerned about market volatility, focus on what you can control:
1. Revisit Your Portfolio
- Ensure your stock-to-bond ratio aligns with your goals and risk tolerance.
- Market movements can shift allocations. A 60/40 portfolio might now be 80/20, increasing risk.
- Rebalance if necessary. A professional or robo-adviser can help.
2. Build a Cash Cushion
- Financial planner Milo Benningfield suggests keeping at least one year’s worth of expenses in cash.
- A cash buffer provides emotional and financial stability, letting you ride out market fluctuations.
3. Diversify Income Streams
- Retirees could consider immediate annuities for guaranteed lifetime income.
- Diversified income strengthens financial plans both psychologically and financially.
4. Check College Savings Plans
- Families using 529 plans should review target-enrollment funds, which adjust stock-to-bond ratios as enrollment nears.
- Risk levels vary: Vanguard’s 2030 fund holds 42.6% stocks, while T. Rowe Price’s has 52.5%.
A Look Ahead: Managing Uncertainty
While Trump’s presidency could introduce volatility, the stock market often acts as a check on policy decisions. Experts recommend focusing on the long term and maintaining a well-balanced portfolio. “The costs of panicking to cash in 2020 would have been significant,” said Andy Reed of Vanguard.
If you’re still uneasy, consult a fiduciary financial adviser to ensure your investments align with your goals. Remember: history shows that staying invested and maintaining a diversified, balanced portfolio is often the wisest move.