How to Handle Stock Market Downturns, Ep #258

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How to Handle Stock Market Downturns

Do downturns in the stock market inevitably lead to down years? On the show this month, I’m walking you through an analysis of U.S. market trends over the past two decades, illustrating how downturns, even severe ones, often don’t spell disaster for annual returns. I’ll also share what savvy family stewards can do to weather these turbulent times and potentially capitalize on them.

From practical strategies like Roth conversions and strategic rebalancing to steering clear of emotionally driven decisions, this episode is packed with insights to help you take family stewardship wealth to the next level. Tune in to see how a long-term, data-driven outlook can lead to more confident investing, regardless of market swings. 

Outline of This Episode

  • [3:31] Do downturns lead to down years?
  • [8:22] This is a volatile year for US stocks, but international companies did better.
  • [11:44] Stay invested; the market rebounds quickly.
  • [14:15[ Post-crash market rebound patterns.
  • [18:43] My guide to strategically rebalancing your portfolio.

Understanding Market Fluctuations

Between 2005 and 2024, the U.S. stock market witnessed only three negative years out of twenty, a testament to its resilience. Despite experiencing several downturns during those years, market recovery was the norm. For instance, although 2020 began with a staggering 35% downturn due to the COVID-19 pandemic, it ended 21% up.

Similarly, in 2011, despite a 20% downturn during the year, the market concluded with a positive return. This historical perspective highlights the fleeting nature of downturns and underscores the importance of maintaining a disciplined approach to investing during turbulent times.

A critical question for investors is whether downturns inevitably result in negative annual returns. Over the past twenty years, analysis reveals that downturns rarely dictate an entire year’s trajectory. 17 out of the last 20 years ended positively, despite intrayear downturns ranging from 6% to as high as 35%.

The takeaway here is significant: short-term market fluctuations do not always translate into negative returns, emphasizing the importance of a long-term perspective and patience.

Why Staying the Course Pays Off

Many investors, spooked by temporary market declines, resort to withdrawing their investments, potentially locking in losses. Instead, remaining invested allows one to benefit from eventual recoveries. Data shows that three-day drops, like the 11% decline recorded recently, are usually followed by substantial gains over the subsequent year, three years, and five years. Investors who maintain discipline through these downturns often see their portfolios grow significantly when the market rebounds.

Practical Strategies for Navigating Downturns

For those unsure how to act during a downturn, consider these proactive measures:

  1. Avoid Constant Monitoring:

Constantly checking your investment portfolio during a downturn can lead to emotional decision-making. Once your strategy is in place, trust your plan and avoid frequent account reviews that can heighten anxiety and fear, potentially driving impulsive actions.

  1. Roth Conversions:

Market downturns present an opportune time for Roth conversions, allowing investors to transfer investments into a Roth IRA at reduced valuations. As the market recovers, gains in the Roth IRA grow tax-free, maximizing long-term benefits.

  1. Tax Loss Harvesting:

When markets dip, investors can sell losing investments to offset capital gains taxes. This tax-efficient strategy enables the reinvestment of proceeds in similar securities to maintain the desired asset allocation while benefiting from potential tax reductions.

  1. Strategic Rebalancing:

Another critical step is rebalancing portfolios by purchasing undervalued stocks during a downturn. By strategically realigning asset allocations, investors set the stage for potential gains when the market rebounds. Navigating market downturns confidently requires understanding their historical context and implementing practical strategies. These periods, though challenging, are fertile ground for growth when approached with discipline and foresight.

Whether through Roth conversions, tax loss harvesting, or rebalancing, taking controlled, strategic actions can position family stewards to capitalize on eventual market recoveries. By focusing on what can be controlled and maintaining a long-term outlook, investors align themselves with historical trends that favor resilience and recovery in the stock market.

Resources Mentioned

Connect With Scott Wellens

Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the US Securities and Exchange Commission in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment, or legal advice.

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About the author, Scott Wellens

Scott Wellens, CFP® is an investment advisor and founder of Fortress Planning Group. After earning his Bachelor of Science degree from the University of Wisconsin-Oshkosh, Scott quickly ascended to become a Vice President of North American Sales at a major regional provider of telecommunications infrastructure. While financially successful in this role, Scott searched for ways to pursue his passion related to financial literacy and providing financial freedom for both his own family and others. During his search, Scott became curious about the significant gap he found in the financial services sector: he was unable to find a comprehensive financial planner that maintained a family stewardship lens without being attached to financial products. Scott decided to fill that gap by creating his own planning firm that maintains a strong passion for comprehensive, unbiased wealth planning that is genuinely client-centered.

Scott resides in Menomonee Falls, WI with his family. He is the father of three active and independent daughters who keep him on his toes. Scott is an active community member, serving on the Hamilton Education Foundation Board, serves as a Dave Ramsey Financial Peace facilitator and leads the All Pro Dad’s group at their local elementary school. Scott enjoys spending his free time visiting state parks with his family, reading, and watching the Milwaukee Bucks and the Green Bay Packers win ball games.

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