Our Counsel After April’s Spring Slide

The first down month in six just ended. Yes, April, now officially in the books, was stocks’ first down month since last October, when the autumn’s correction ended. Global markets fell -3.7%, and the S&P 500 slipped -4.1%.^[i] While such declines aren’t abnormal, the recent streak of gains may make them feel unsettling. So how should investors treat this, the first pullback, which perhaps begins the first correction since last year? With patience, discipline and a long-term focus, in our view.

Volatility is one of those things everyone knows, on paper, is a fact of investing. No stock chart ever moved straight up and to the right only, uninterrupted. Statements about downside risk being the tradeoff for higher long-term returns frequently get nods of understanding. But when it actually strikes, those nods vanish.

Amid volatility, instead of stressing core principles, headlines will usually marry the drop with the fear du jour to whip up a frenzy and garner more clicks. Combine that with investors’ innate tendency to hate losses more than they value equivalent gains, and it can trigger a powerful urge to just do something, anything, to restore some calm.

Hence, when stocks hit a speedbump after a long rise, the popular conversation frequently turns to how investors can ensure they lock in recent gains and guard against downside. We have seen an abundance of this for the past couple weeks. Some argue for simple profit-taking, implying there will never be a subsequent investment decision involving those funds. Others for complex hedging strategies. They all offer the perception of safety and emotional comfort, the knowledge that if the market keeps going down, investors won’t be as exposed.

In our view, this is the wrong medicine. It casts short-term volatility as something that can and must be avoided in order for investors to reach their long-term goals. Yet history shows those things aren’t correct. Short-term negativity—pullbacks and corrections—strikes for any or no reason, at any time. And it usually ends fast, with a strong recovery to fresh highs. Negativity both starts and ends before most people realize it.

Whether negativity accompanies a scary story or not, it comes from sharp swings in sentiment. Feelings. Emotions. These are fickle and change on a dime, often when folks least expect it. Rewind to the end of March, when this pullback began. At the time, headlines weren’t warning trouble loomed. Rather, they were celebrating the best Q1 returns in five years, cheering good economic data, salivating over the prospect of Fed rate cuts and basically saying, smooth sailing ahead.

Now they are saying the opposite, warning further trouble must await because the Fed isn’t cutting, headline Q1 GDP growth was supposedly disappointing, inflation is lingering and geopolitics are tense. Yet all these fears are well-known and overblown. They are typical wall-of-worry bricks, not the huge, shocking negatives that typically sneak up and cause bear markets. This suggests to us that stocks are likely to move on much sooner than people anticipate. Perhaps not tomorrow. Maybe we breach the -10% correction threshold first. Maybe not. But it looks likely to be soon, in our view. Hence, the main risk investors face isn’t participating in a bit more downside, but in missing the recovery that erases it.

Therefore, we think a better way to navigate rocky stretches is to prepare emotionally. Not with portfolio moves aimed at guarding against it. But by remembering your long-term goals and the returns you need to reach them—returns you will reap only if you are invested in up markets. That requires participating in rebounds, which are impossible to time with precision, hence the need to stay patient and invested through the wobbles.

Keeping a longer-term perspective and remembering why you are investing can help keep you on track. If you find tuning into financial news chatter makes you more anxious and tempted to make big portfolio moves, remove the temptation (other than MarketMinder!). Get outside. Enjoy the spring sun. Take a walk. Have tea with a friend. Work on a project. Cook or bake something delicious. Take the grandkids for the afternoon. Go for a drive. Whatever you fancy! All of these things are bigger, better and more consequential than whatever stocks do in a given week, month or season.

They are also more rewarding, financially and mentally, than making the error of selling into volatility. It might feel good in the moment, but it means locking in prior declines and, potentially, missing the ensuing rebound. Taking money off the table sounds harmless, but it means limiting your participation in bull markets and, therefore, limiting your progress to your long-term investing goals. It could mean running out of money too soon in retirement, which is a heckuva lot more painful than enduring a rocky spell in the market today.

So, stay cool. Headlines encouraging you to veer from an investment strategy you picked with your long-term goals in mind aren’t your friends. Patience and discipline, those are your friends.