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From highs to lows: Why the market dip is no reason for long-term investors to panic
Jacob Falkencrone
Global Head of Investment Strategy
Key points:
- Stay disciplined: Despite recent volatility, long-term investors should avoid panic and stick to their investment strategy, as history shows markets often recover from downturns.
- Look beyond the noise: Market pullbacks are normal. Focus on long-term goals, maintain diversification, and consider the current market dip as a potential opportunity to invest in quality assets at lower prices.
- Embrace the boring: Defensive sectors like consumer staples and utilities can provide stability during market turbulence, proving that "boring" can be the best strategy in uncertain times.
Just a few weeks ago, on February 19th, 2025, the stock market was celebrating fresh all-time highs. Fast forward to today, and the sentiment couldn’t be more different.
The S&P 500 has now dropped around 9% from its peak, with the latest sell-off sending the index down 2.7% on Monday alone. The tech-heavy Nasdaq fared even worse, sliding 4%, while big names like Tesla, Apple, Microsoft, and Amazon saw significant losses.
At the heart of this rapid shift in market mood are growing fears of a US recession. President Donald Trump’s recent comments about the potential for an economic downturn, combined with his administration’s unpredictable tariff strategy, have left investors jittery. This kind of uncertainty often leads to sharp market reactions as investors struggle to make sense of the new risks on the horizon.
"When markets get rough, remember: Boring can be better than thrilling. Defensive plays and steady hands win the long game."
Looking past the noise
While the current market environment might feel unsettling, it's important for long-term investors to focus on the bigger picture. History shows that market volatility is not only normal but expected. An in-depth analysis of the S&P 500’s performance over the past 60 years reveals that, despite average annual drawdowns of 14.4%, the market has delivered an average annual return of 8.7%.
More than half of the years experienced drawdowns exceeding 10%, yet nearly 75% of all years ended in positive territory. These figures reinforce a critical lesson: short-term market movements are often just noise. Investors who focus too much on daily market swings risk making decisions based on emotion rather than strategy. The current situation is a prime example of why staying disciplined and maintaining a long-term perspective is essential for investment success.
"Volatility is a normal part of the investment journey. Those who stay disciplined often find smoother waters ahead."
Why "boring" can be better than "thrilling"
When markets are in turmoil, there is a natural temptation to chase quick gains or react hastily to negative news. However, history suggests that the best approach during market downturns is to focus on the "boring" investments—those in sectors like consumer staples and utilities. These areas of the market tend to perform relatively well during economic slowdowns because they offer products and services that remain in demand regardless of market conditions.
For retail investors, now might be a good time to review their portfolios and ensure they are diversified across different asset classes and sectors. Having a balanced mix of investments not only helps manage risk but also positions portfolios to benefit from eventual market recoveries.
How should investors behave?
- Stay invested: The instinct to sell during downturns is natural, but it often leads to locking in losses. Long-term investors benefit from riding out market storms and focusing on their financial goals.
- Rebalance your portfolio: Market volatility can shift the balance of your investments. Regularly reviewing and adjusting your portfolio can help maintain your intended risk profile.
- Embrace diversification: During uncertain times, diversification is your best friend. Defensive investments, such as dividend-paying stocks or sectors like consumer staples, can add stability.
- Avoid knee-jerk reactions: Making investment decisions based on short-term market movements rarely pays off. Instead, focus on your long-term plan and avoid getting caught up in the market’s daily drama.
- Look for opportunities: While the market is down 9% from its highs, this could be an opportunity to buy quality assets at lower prices. If your investment strategy involves regular contributions, continue to invest consistently.
The shift from record highs in February to the current market pullback is a reminder of how quickly sentiment can change. However, history and analysis show that volatility is part of investing. By focusing on what you can control, avoiding the noise, and maintaining a long-term perspective, you increase your chances of achieving strong returns over time. Markets may be down, but for disciplined investors, this could be a time to build a stronger portfolio for the future.