6 Things Feds Should Consider Doing During Market Volatility
- Tyler Weerden
- Apr 16
- 25 min read
Updated: Apr 17
We’ve all seen the video. Someone’s driving down the road and they encounter something they don’t like. An animal, debris, a patch of ice, maybe a touch of the rumble strip. Their instincts kick-in and tell them they need to avoid this. Instead of a gradual adjustment, they overcorrect, jerking the wheel to one side. As the car careens towards a new hazard, they jerk the wheel back the other way. They’ve now entered an uncontrollable cycle of overcorrections which usually don’t end well.
Unfortunately, some people are currently trapped in a series of financial oversteers.
The S&P 500 (TSP C Fund) fell 4.8% on Thursday April 3rd. On Friday April 4rd it dropped another 5.9%. The Dow Jones U.S. Completion Index (TSP S Fund) didn’t fare any better, falling 6.99% on April 3rd and 5.23% April 4th. Stocks continued to fall until April 9th when the S&P 500 soared 9.5% in a single day! Talk about whiplash. For those who sold their stocks and fled to what feels safe (bonds, cash, TSP G Fund), a 9.5% single-day surge was missed. On the other hand, what if those who fled to safety are avoiding an even bigger drop that hasn’t come yet? Maybe they’ll end up avoiding a lot of pain. Maybe they’ll end up avoiding a lot of gain.
Does anyone really know? Absolutely not.
The crystal ball illuminating our financial future is broken. It always has been and it always will be (despite what some “experts” say). No matter how smart we get, our ability to accurately predict market tops and market bottoms is a coin toss at best. So, what should you do during volatile times? When people are struggling with market fluctuations and seek guidance, they tend to get standard responses: “You haven’t lost anything if you haven’t sold.” “You’re buying at a discount!” Yes, these statements are true, but there comes a point when people need more than a simple one-liner.
What’s better than catchy phrases? Action items, warnings, and perspective. These are the top six things federal employees should consider doing right now.
(1) Asset Allocation Review
Do you have the appropriate percentage of stocks, bonds, and cash for your personal financial situation? Now is a good time to reassess.
I’m not suggesting a complete overhaul, an emotional reaction, or any sort of drastic change. This is simply the time to reflect, tune out the noise, and honestly ask yourself, “How do I feel?” If you’ve been losing sleep, feeling anxious, constantly consuming financial media, desperately seeking advice from strangers on social media, or making knee-jerk changes to your portfolio, I would suspect your asset allocation was not appropriate. You may have been overly exposed to stocks.
You’ve probably heard the term “risk tolerance” before. Risk tolerance is your willingness to accept the ups and downs, and potentially accept losses, in order to meet investment goals. Your attitude, perception, education, preference, and experience all play a part in your risk tolerance, which is just one factor that helps shape your asset allocation. Ultimately, your mix of volatile vs. non-volatile assets depends on your risk tolerance, time horizon, risk capacity, fixed income sources, liquidity needs, and the portfolio returns required to meet your goals.
Bridging the Income Shortfall
When we're talking about fixed-income sources for retirees, the federal pension (and retiree annuity supplement if eligible) play a large role in that equation. When you're figuring out the level of risk you need to take, you're essentially solving for an income shortfall that will be replaced by your portfolio, and then designing a portfolio that can meet that need. The bigger your federal pension, the smaller the income shortfall, the higher capacity your portfolio has to weather volatility.
Individuals with large pensions and other fixed-income sources that cover their living expenses may not require as many bonds and have more capacity for volatility. On the other hand, if they don’t need income from the portfolio, should they expose themselves to volatility? This is a frequent debate in personal finance circles. As Dr. William Bernstein said, “When you've won the game, why keep playing it?”
For those who still require a steady income stream from their portfolio, they may want to set aside a few years of spending in less volatile assets like cash and bonds to make sure they're not selling assets when values have dropped.
Try assigning a "lifespan" to each dollar. Money you’re going to spend next month should not be treated the same as money you’ll spend in 5 years. There are infinite names for this: time segmentation, investment positioning, spending segmentation, bucketing, and asset liability matching to name a few. If you properly segment your money, the volatility we’re seeing now shouldn’t be impacting your short-term dollars.
Time to Adjust? Take Your Time.
What if you decide that your asset allocation needs tweaking? I personally would wait a little bit before pulling the trigger and doing an entire portfolio shift. Stress can impair our ability to think clearly and make sound decisions. Give yourself time to really figure out what an appropriate asset allocation is for your unique circumstances.
What Could be Worse Than Bad Returns?
For retirees, or those close to retirement, thinking that cash and bonds are the “safest” assets right now is understandable—but potentially misleading. I would caution you that less volatile does not equal less risky.
For those familiar with the famous “4% Rule” (which isn’t really a rule and has been adjusted away from 4% multiple times), you know that the author William Bengen studied safe withdrawal rates over historical 30-year retirement time horizons. Bengen’s model portfolio was made up of 50% U.S. stocks and 50% intermediate term U.S. Treasury Notes. Using historical data all the way back to 1926, Bengen concluded that in the most conservative scenario the hypothetical retiree could withdraw 4% annually adjusted for inflation and not run out of money.
Do you want to guess which starting year had the worst result in the 4% study?
It must have been 1930 with a -28.48% stock market return. Or 1931 with a -47.07% market decline. What about 1937 with a -38.59% crash. Between the Great Depression and World War II, this had to have been the worst time for someone entering retirement, right? Wrong.
1966 was the worst starting year in Bengen’s study. Why were the late 60’s so bad for retirees just starting out? Were the stock market returns worse than the 30s and 40s? Nope. Don’t get me wrong, there were some bad years (1977: -11.50%, 1974: -29.72%, 1973: -17.37%, 1969: -11.36%, 1966: -13.09%), but these weren’t anything compared to the 30s or 40s. So, what made 1966 the worst year to start retirement?
Inflation. Stubbornly high inflation that continued all the way through the 1970s and into the early 1980s.
One of the biggest financial risks you face, just as damaging as bad stock market returns, is inflation. This silent portfolio killer will slowly erode your purchasing power and leave you with less and less each year. Don’t assume that cash and bonds are “safe”, or “riskless assets” simply because they’re not as volatile as stocks. Volatility is not synonymous with risk.
Currently Have Extra Cash?
Due to the recent turmoil surrounding federal worker’s employment status, many feds were hoarding cash in preparation for possible involuntary separation (e.g., Reduction in Force). Since then, some of you have been notified in writing that your agency, department, or specific job category has received an exemption from hiring freezes and layoffs. With that information, what do you do with the excess cash above and beyond your emergency fund? Should you get more aggressive? Is this the time to dump excess cash into the market all at once? Should you drip it in slowly (known as dollar-cost average)? Is the market still overvalued?
Again, nobody has the perfect answer to these questions, but this is how I look at it.
Statistically, the stock market has gone up more years than it has gone down. Between 1928 and 2024, the U.S. stock market (as measured by the S&P 500) posted positive returns in 71 out of 97 years, or approximately 73% of the time. History and pure math would suggest you invest all of the additional cash you have now, since the odds are in your favor that the year will end positive.
On the other hand, what if we still have another 10% or 20% drop coming this year? If that happens, wouldn’t it have been better to wait? If you’re mentally struggling with this decision and you feel like you’ll be full of regret, there’s nothing wrong with slowly investing it. Maybe you invest half now and half a month from now. Or divide it up by eight and invest it once per month on the first day of each remaining month.
There is no wrong answer. Regardless of whether you choose to invest via lump-sum or dollar-cost average, you're correct because you’re taking the positive step of investing. 5, 10, 20 years from now, this will be a blip on the radar and not something I would waste a lot of bandwidth on.
(2) Create an Investment Policy Statement
An Investment Policy Statement (IPS) is a personal guide / rule book for you to follow during times like this. There’s no exact template or IPS rules you must follow and you don’t need to work with an advisor to create it.
Write down your target asset allocation and why you selected that mix. Write down what you’ll do if the market drops significantly. Write down what you’re not willing to do (e.g., pay a certain expense ratio, invest in a specific type of fund, use leverage, etc.). Write down what determines when you’ll buy or sell assets to rebalance back to your target allocation. Maybe you rebalance by calendar date to remove all emotion. Maybe you set tripwires, such as a 10% deviation from your target allocation requires rebalancing, regardless of what’s going on in the market.
Having a written document in your own words will help you navigate market volatility. You’re crafting this guidance in your own words for your future self. Think of yourself as the pilot of your financial life. When the plane starts doing something that makes you anxious, start working your way through the written checklist.
(3) Tax Loss Harvest
Before we dive into tax loss harvesting, please know that this strategy is only for taxable brokerage accounts, not your IRA or employer sponsored plans like your TSP, 401(k), 403(b), 457(b), etc.
Capital Gains Overview – If you own an asset like a share of Apple stock or the Vanguard S&P 500 Index Fund in a taxable brokerage account and you sell that asset for a profit / “capital gain”, you’ll be taxed federally on that gain and may also have to pay state income tax.
Purchase the asset for $100 and later sell it for $150, the capital gain that may be taxable is $50.
How much tax? It depends how long you owned it, how much other income you have, and tax filing status.
If you held the asset for more than a year, you’ll be subject to long-term capital gains (LTCG) rates which are either 0%, 15%, or 20% depending on your total income and tax filing status (2025 capital gains brackets can be found here).
If you held the asset for one year or less, you’ll be subject to short-term capital gains (STCG) rates which are the same as the ordinary income tax you pay on your W2 wages (10%, 12%, 22%, 24%, 32%, 35%, or 37%). This is just federal tax; you may also have to pay state income tax on your gains.
Additionally, single tax filers with Modified Adjusted Gross Income (MAGI) above $200,000, or those filing Married Filing Joint with MAGI above $250,000 may be subject to an additional 3.8% Net Investment Income Tax (NIIT). For those wondering what their MAGI is – for most people it’s their regular AGI on line 11 of the 1040. For those with foreign earned income, the AGI from line 11 is adjusted to calculate the MAGI for NIIT purposes. More information from the IRS on NIIT and MAGI here.
Offsetting Gains with Losses – If you sell something for a gain and also sell something for a loss, you can use those losses to offset the gains. Additionally, if you use all of your losses to offset gains but still have more losses, you can offset up to $3,000 worth of ordinary income with capital losses. If you still have losses above that $3,000 amount, you can carry forward the remaining losses indefinitely to wipe out other gains and/or ordinary income in future years.
Here’s what this would look like.
(1) Purchase Stock A for $1,000 and sell it more than one year later for $3,000 = $2,000 LT gain
(2) Purchase Stock B for $8,000 and sell it more than one year later for $2,000 = $6,000 LT loss
(3) The $2,000 gain from Stock A is eliminated/offset by $2,000 of Stock B’s $6,000 loss.
This leaves $4,000 remaining loss that hasn’t been used to offset capital gains.
(4) $3,000 of Stock B’s $4,000 remaining loss can offset $3,000 of ordinary income
(5) $1,000 of Stock B’s remaining loss can be carried forward indefinitely until it’s offset by future capital gains or ordinary income.
Another way to look at it.
Starting with a $6,000 loss from Stock B
-$2,000 used to offset Stock A’s gain
-$3,000 used to offset $3,000 ordinary income (maximum amount per year)
-$1,000 carry forward indefinitely to future years
=$6,000 loss from Stock B
However, don’t you still want to maintain your target asset allocation?
In the above scenario, you sold Stock B to offset gains and ordinary income. The sale of Stock B generated $2,000 cash in your account. You want the cash proceeds from selling Stock B invested in the market versus sitting in cash in order to maintain your target stock/bond mix.
This is where the tax loss harvesting (TLH) strategy comes into play.
With tax loss harvesting, you sell something at a loss to offset gains, and then use the proceeds from that sale to buy something that is similar (like another stock fund), but not “substantially identical” per the IRS. If you do buy the same stock or something substantially identical, you’ve triggered a “wash sale”.
Wash Sale Warning – If you buy the same stock or something “substantially identical” in any account 30 days before or after the sale that triggered the loss, you will not be able to use that loss to offset the gains or ordinary income. If you do trigger a wash sale, the loss will be disallowed.
Buying something substantially identical includes trading options, equity compensation transactions, and reinvesting dividends. Unfortunately, the IRS has failed to define “substantially identical”, but we can use common sense. Selling a Vanguard S&P 500 index fund and buying a Fidelity S&P 500 index fund seems pretty identical to me. Common examples of similar but not substantially identical include Coke/Pepsi and Home Depot/Lowes.
Let’s do a TLH example using an S&P 500 index fund and a total U.S. stock market index fund. Very similar stock assets, but I would argue they’re not substantially identical. The total U.S. stock market index fund holds 3,600+ stocks to include small, mid, and large companies where the S&P 500 fund holds 500(ish) large companies.
Step #1: Let’s say a few years ago you purchased $10,000 worth of VFIAX (Vanguard S&P 500 Index Fund), but now it’s worth $5,000. You could sell these shares to incur / “realize” a $5,000 loss. This loss can offset gains and ordinary income up to $3,000. After selling, you would have $5,000 cash sitting in your brokerage account from this sale of VFIAX.
Step #2: Sell shares of any asset to incur/ “realize” a $5,000 gain. You wouldn’t pay federal capital gains tax on this $5,000 gain because it was offset by the $5,000 loss from VFIAX in Step #1.
Step #3: Take the $5,000 cash proceeds from the sale of VFIAX in Step #1 and buy a fund that isn’t “substantially identical” to the S&P 500 index fund. In this example we’ll use VTSAX (Vanguard Total U.S. Stock Market Index Fund). This fund would keep you exposed to large U.S. company stock, while not investing in the exact same fund. VFIAX and VTSAX have historically performed pretty similarly.
End result:
You eliminate/offset $5,000 worth of profit/capital gains.
You purchase something that wasn’t substantially identical (VTSAX).
You remain invested in the market with the same stock exposure, just using a different fund (VTSAX vs. VFIAX).
*Consult with a tax professional before implementing a tax loss harvesting strategy.
(4) Roth Conversion Assessment
A Roth conversion is where you take pre-tax / traditional money and convert it to tax-free / Roth money. When you convert dollars from the “not-yet taxed” bucket to the tax-free bucket, you have to pay taxes on that conversion as if it were taxable income (you’ll be issued a 1099-R to report at tax time).
This is not going to be an in-depth analysis on the pros and cons of Roth conversions – that’s an entire article on its own. What I do need to say is that Roth conversions seem to be all the rage right now (maybe that’s good, maybe it’s bad). You must fully understand why you’re doing a Roth conversion and the other tax dominoes that may fall when you convert. Do not blindly start converting your pre-tax money to Roth simply because you’d rather have more tax-free money (wouldn’t we all?).
Let’s say you’ve run the numbers, looked at all the other variables, and have decided that this year is the year to do Roth conversions. Is now a good time to execute that conversion? Doing conversions while the value of your assets are down is optimal from a “bang for your buck” perspective. Here’s how.
Scenario A
January 1 – You own 50 shares of ABC stock in a traditional IRA and each share is worth $100 ($5,000 total value).
You’re in the 24% bracket and you have $500 cash outside of your IRA to pay the tax on a Roth conversion.
You convert $2,083 from your traditional IRA to your Roth IRA and pay 24% federal tax ($500 tax).
Result: You converted 20.83 shares ($2,083 divided by $100 share price).
Scenario B
April 1 – You still own 50 shares of ABC stock in a traditional IRA but the value dropped and now each share is worth $80 ($4,000 total value).
You’re in the 24% bracket and you have $500 cash outside of your IRA to pay the tax on a Roth conversion.
You convert $2,083 from your traditional IRA to your Roth IRA and pay 24% federal tax ($500 tax).
Result: You converted 26.04 shares ($2,083 divided by $80 share price).
Using this approach, where you have a set amount of cash outside of your IRA to pay the tax means that even during market downturns, it’ll cost the same to do a conversion. You also won’t be converting at a lower tax rate just because your shares went down in value. You still added $2,083 to your taxable income, spent $500 to pay the tax on the conversion, and converted at the 24% rate. So why is this good? Because you scooped more shares with the tax-free shovel. You have more shares in the tax-free Roth bucket because the shares declined in value.
Same size shovel ($500) but smaller pieces of rock ($80 vs $100 share price) means that more rocks (shares) can fit in the shovel.
In Scenario A, you would have converted 41% of your IRA from traditional to Roth. In Scenario B you converted 52% of your IRA from traditional to Roth. Why does this matter? What if your window for conversions is limited? Maybe you’re approaching the age at which you’ll claim Social Security, turn on a pension, start another job, or begin taking Required Minimum Distributions (RMDs). If you’re doing conversions within a limited timeframe, being able to convert a larger percentage of your portfolio is helpful.
Don’t forget this could work the opposite way too. You could convert shares now and the market could decline further, which may trigger some buyer’s remorse. As with everything else, you need to make an educated guess with the best information you have today. That broken crystal ball that fails us with market timing and stock picking also doesn’t work for Roth conversion timing.
To convert or not convert, this seems to be the hot button financial topic of our time. Please don’t dive into conversions without truly understanding your full financial picture. How much tax you paid last year or this year isn’t the sole focus. You need to see what your lifetime tax burden looks like at different stages. Here’s a great video where Mike Piper, CPA discusses Roth conversions at the 2024 Bogleheads Conference.
*Consult with a tax professional before implementing a Roth conversion strategy.
(5) Be More Skeptical
Remember the scene from Jaws where the shark is circling the boat? Or every movie with a breakup scene and someone quickly swoops in with a shoulder to cry on? Some of us might be starring in a similar movie right now. Don’t get me wrong, I don’t think we’re all going to get eaten by the proverbial financial shark, or be the victims of a cautionary dating tale...but there are sharks circling and people waiting to pounce.
In times of anxiety, we all need some reassurance. You’ve probably seen the same Facebook posts and comments I’ve been seeing. Some people are clearly spooked and are looking for someone to tell them that this too shall pass. There’s nothing wrong with that.
However, there could be something wrong with who you’re getting that reassurance from. There are two groups that I would proceed cautiously with especially during times of volatility: financial service salespeople and social media “experts”.
Financial Professionals – The titles “financial advisOr”, “financial advisEr”, “wealth manager”, “financial planner”, “financial coach”, etc. are not strictly regulated or only used by those who have your best interests in mind. There are plenty of salespeople using these titles who will “reassure” and “comfort” you with their complicated, high-priced, high-commission products and “strategies” that aren’t even remotely appropriate for you.
What’s worse, they’ll recommend their product/service before they understand your complete financial picture. They won’t ask about your family, goals, values, tax situation, legacy planning, estate documents, FERS pension, FEHB coverage, FEGLI, cash flow, Social Security, debt, education funding, etc. – they’ll simply assure you that they’ll help you sleep at night.
Fortunately, the financial service industry is slowly moving in the right direction. The North American Securities Administrators Association (NASAA) just proposed an amendment to their rules that will prohibit individuals from using “adviser” or “advisor” unless they or their firm are actually registered as an Investment Adviser Representative (IAR) or Registered Investment Advisor (RIA). Unfortunately, there are instances where someone could be dually registered and could switch between their salesperson hat and their advisor hat.
This is all to say that you need to do your due diligence and truly understand who you’re working with, exactly how they’re compensated (fee-only, fee-based, Assets Under Management, commissions, etc.), if they sell any products, and if they’re a fiduciary. There are free tools on the due diligence page of my website and some FAQs that you can ask financial planners you interview.
Social Media – I really enjoy most Facebook groups focused on federal employees and their finances. I’m constantly impressed with how much federal employees know about their benefits and sound financial planning. Everyone in the Choose FI Feds or FedFam Facebook groups knows that when it comes to benefits, a group member named “Teresa” is a non-HR federal employee who can rival some HR professionals. Providing sourced information with the constant disclaimer to do your own due diligence, it’s members like Teresa who make these groups a strong community of feds helping each other navigate their benefits and their finances.
Unfortunately, not everyone providing advice is as well versed. With the amount of new information regarding RIF, VERA, DSR, VSIP, and DRP, on top of an already complicated benefits web, the amount of bad / inaccurate advice being given is alarming. With the speed at which executive orders and agency directives have been coming out, the volume of posts, comments, and shaky advice has also skyrocketed.
This is not an insult to the groups or group members. Everyone is genuinely trying to help and believes they have the right answer, but this stuff can be very nuanced. As an example, I constantly see someone who’s covered by the Foreign Service Pension System (FSPS) asking advice and getting incorrect answers from group members who are replying with information from the Federal Employee Retirement System (FERS). One recent commenter informed an FSPS member that they had to work an additional 6 years, when in reality they could retire with full benefits immediately.
How should your TSP be invested? Should you increase / decrease contributions? Should you use the Mutual Fund Window? Should you take the DRP? These are not simple questions that strangers can, or should try to easily answer. There’s nothing wrong with polling the group or trying to see what’s worked for other people. However, you should not be pulling the trigger on any of these recommendations.
Bottom line - nobody should make financial decisions based on advice from strangers on social media.
Resources I trust and rely on:
Barfield Financial (website) / Barfield Financial (Facebook)
(6) Zoom Out
Yes, the S&P 500 is down over 10% year-to-date as of April 16th. Does it matter? If you have the appropriate asset allocation that matches your level of risk, it shouldn’t. Whether you’re 28 or 68, proper asset allocation will help you weather these ups and downs.
For those of you who are still a long way (10+ years) from spending the money you invest today, you’re fortunate to be buying at lower prices. Investing is a game of collecting shares. I wish there was an option for accumulators to log into their accounts and see total shares versus total dollars. Regardless of what the market does, each pay period when you contribute to your TSP, the number of shares you own is increasing.
For those who are retired and living off of their portfolio, I am not dismissing your anxiety. Nobody can fault you for disliking market downturns. Life is very different for you now that you’re no longer in the accumulation stage. If you feel like your retirement income strategy is falling apart because of the recent volatility, I would revisit action item #1 and reexamine your asset allocation.
While the S&P 500 is down -10% as of April 16, 2025, the return since April 2020 is over +83%.
But This Time is Different!!!
Okay, fine. I’ll agree that today is different than yesterday and tomorrow will be different than today. “We’ve never had [insert event] happen.” “We’ve never seen [insert action] from an administration.” What about the fed? China? Inflation? Tariffs? National debt? I get it. Many of these things trouble me too, but it doesn’t change how I invest. This leads me to one of my favorite quotes from Israeli-American Nobel prize winning psychologist Daniel Kahneman: “The correct lesson to learn from surprises is that the world is surprising.” We need to embrace the fact that “this time is different” and will continue to be different. I invest expecting volatility and random surprises, both good and bad.
Here are some news headlines from history where “this time was different”. Below the headline is the S&P 500 return for that year, as well as the total return (with dividends reinvested) 1 year, 5 years and 10 years later.
"Dow Jones Hits 12-Year Low Amidst Ongoing Bear Market" (Chicago Tribune, December 1974)
What was happening: Oil crisis, stagflation, weak corporate earnings, and global political instability.
1974 return: -26.47%
1 year later: +38% (+38% annualized)
5 years later: +101% (+15% annualized)
10 years later: +294% (+14% annualized)
“PANIC!” (New York Daily News, October 1987)
What was happening: “Black Monday” caused by high valuations, investor panic, and automated selling.
1987 return: +5.25%
1 year later: +2.79% (+2.79% annualized)
5 years later: +84% (+12% annualized)
10 years later: +358% (+16% annualized)
"The Crash Begins: NASDAQ Plunges 57% from High" (CNN, October 2000)
What was happening: Dot-com bubble/tech burst after a period of unreasonably high valuations.
2000 return: -9.10%
1 year later: -21% (-21% annualized)
5 years later: -7% (-1.4% annualized)
10 years later: +1.5% (0.15% annualized)
“Meltdown in U.S. finance system pummels stock market” (ABC 6, September 2008)
What was happening: Global Financial Crisis, sub-prime mortgage lending, bank failures, bailouts.
2008 return: -37%
1 year later: -11% (-11% annualized)
5 years later: +54% (+9% annualized)
10 years later: +193% (+11% annualized)
“Stocks plunge as Wall Street, White House see recession risk" (PBS, March 2020)
What was happening: Covid-19 pandemic.
2020 return: +18.40%
1 year later: +50% (+50% annualized)
5 years later: +130% (+18% annualized)
Other than for the year 2000, all of these historic market crises resulted in more than 50% returns for those who kept investing and sat patiently for at least 5 years. Even when we include the -7% 5-year return from 2000 – 2005, the average 5-year total return after these historic market downturns was +72%. On an annualized basis, even with 2000-2005, we get a 10.52% return.
Intra-Year Volatility
If we’re already experiencing this volatility, we must be on a path to finish the year in the red, right? Not necessarily.
2021: S&P 500 experienced a -5% intra-year decline, ended the year +27%
2020: S&P 500 experienced a -34% intra-year decline, ended the year +16%
2016: S&P 500 experienced a -11% intra-year decline, ended the year +10%
2012: S&P 500 experienced a -10% intra-year decline, ended the year +13%
2010: S&P 500 experienced a -16% intra-year decline, ended the year +13%
2009: S&P 500 experienced a -28% intra-year decline, ended the year +23%
2006: S&P 500 experienced a -8% intra-year decline, ended the year +14%
2003: S&P 500 experienced a -14% intra-year decline, ended the year +26%
1999: S&P 500 experienced a -12% intra-year decline, ended the year +20%
1998: S&P 500 experienced a -19% intra-year decline, ended the year +27%
1997: S&P 500 experienced a -11% intra-year decline, ended the year +31%
*Not including dividends
This is just a small sampling. According to J.P. Morgan, from 1980 – 2023, the average intra-year decline was -14.2%, yet 33 of the 44 years ended positive.
Recovery from the Bottom
According to YCharts, every bear market since 1950 has lasted an average of 13.8 months. The S&P 500 returns after hitting market bottom have largely been positive, especially the further out you get.
1-month average return after reaching the market bottom: +14.76%
3-month average return after reaching the market bottom: +21.03%
12-month average return after reaching the market bottom: +43.51%
24-month average return after reaching the market bottom: +62.52%
Do you really want to be sitting out of the market trying to predict the market bottom and miss those returns? Do you have the time, skill, desire, and luck to perfectly time market tops and bottoms?
Market Timing & Stock Picking
Remember at the very beginning of this article where I talked about oversteering? This is market timing. Emotionally reacting and making changes based on your personal politics, mainstream media talking heads, Facebook experts, fear, and greed. None of these are part of a sound financial plan.
What makes us think we’re so smart? Recency bias, overconfidence, and herd mentality are common behavioral finance pitfalls.
There are very educated people with lots of letters after their names making big money working for giant financial companies who can’t get this right. They’ve spent their entire professional lives studying the markets, global economics, working on Wall Street, looking at PE ratios, price-to-book, free cash flow, and every other variable that makes people think they can outsmart the market. These fund managers decide which individual stocks to buy and sell, and when to jump in and out of the market. It sounds impressive and must be worth the price tag. They must perform really well against the average investor, right? Year after year we see data showing that over the long run, these active investors can’t beat their passive index counterparts.
Morningstar’s U.S. Active/Passive Barometer Report for Year-End 2024 shows us how many active funds have been successful at beating their passive counterparts as of 12/31/2024. Let’s examine just the S&P 500 passive index versus the actively managed large-cap growth funds.
Active funds’ success rate over 1 year: 40.3%
Active funds’ success rate over 3 years: 17.7%
Active funds’ success rate over 5 years: 8.2%
Active funds’ success rate over 10 years: 2.5%
Active funds’ success rate over 15 years: 1.1%
Active funds’ success rate over 20 years: 1.1%
Good Days and Bad Days are Thick as Thieves
I truly believe that despite whatever global event is occurring, it’s impossible to accurately predict the top or bottom of a market. If you’re going to try your hand at market timing, you have to be right twice. Many people were bragging about their flight out of stocks prior to the 10% drop by end-of-day April 4th. However, the boasting had nearly vanished after the 9.5% boost on April 9th. This is the problem with market timing and reacting versus investing. When you’re sitting on the sidelines waiting for an entry point, you could be missing out on the best days.
You’d think the good days and bad days wouldn’t hang out together, but history (very recent history) has shown us that they do.
J.P. Morgan reports that over the last 20 years, 7 out of the 10 BEST days in the stock market occurred within a 15-day window around the 10 WORST days.
Remember the pandemic crash in 2020? At one point the market was down 34%. Panic had gripped the country as we watched military field hospitals and doctors in moon suits take over school parking lots. The 2nd WORST day of 2020 (Thursday, March 12th -9.51%) was right before the 2nd BEST day of 2020 (Friday, March 13th +9.29%). If you jumped out on March 12th and stayed uninvested, not only did you miss out on the March 13th gains, you also missed a +9.38% bump on March 24th and a +6.2% boost on March 26th. How did 2020 end? A positive return of +18%.
From January 1, 1998 – December 31, 2024, if you were invested in the S&P 500 but sat out of the market during times of volatility and fear, you most likely would have missed some of the best days. If you were fully invested during this period, you could have earned an 8% annualized return.
If you missed the 10 best days, your return dropped to 4.8%
If you missed the 20 best days, your return dropped to 2.8%
If you missed the 30 best days, your return dropped to 1%
Control What You Can
None of the data points above mean much, other than to show you what has happened historically. We all know that past performance is not an indicator or guarantee of future results, but it doesn’t hurt to look at some information from times that were also considered unprecedented. As humans we are emotional beings and therefore tend to mess up this money thing more than we should. Sometimes the right answer is the simplest one. Just because the market is reacting to external events doesn’t mean we have to. Always remember what Warren Buffet said, “The stock market is designed to transfer money from the active to the patient."
5 Things that Matter More than the 6 Things Mentioned Above
-Prioritize physical and mental health (ignore these and all the money in the world won’t matter)
-Make sure beneficiary forms are updated along with having proper estate planning documents
-Pay down debt / know your interest rates
-Have an appropriate emergency fund (regardless of how little interest you’re earning on that money)
-Know your income, expenses, assets, & liabilities (cash flow is the key for both active employees and retirees)
About the Author
Tyler Weerden, CFE is a financial planner and the owner of Layered Financial, a Registered Investment Advisory firm. In addition to being a financial planner, Tyler is a full-time federal agent with 15 years of law enforcement experience on the local, state, and federal level. He has served in both domestic and overseas Foreign Service assignments. Tyler has experience with local, state, and federal pension systems, 457(b) Deferred Compensation, the federal Thrift Savings Plan (TSP), Individual Retirement Arrangements (IRAs), Health Savings Accounts (HSAs), and invests in rental real estate. He holds a Bachelor of Science degree, a Master of Science degree, passed the Series 65 exam, and is a Certified Fraud Examiner (CFE).
Disclaimer
Layered Financial is a Registered Investment Adviser registered in the Commonwealth of Virginia and State of Texas. Registration does not imply a certain level of skill or training. The views and opinions expressed are as of the date of publication and are subject to change. The content of this publication is for informational or educational purposes only. This content is not intended as individualized investment advice, or as tax, accounting, or legal advice. Nothing in this article should be seen as a recommendation or advertisement. Layered Financial and its Investment Advisor Representatives have no third-party affiliations and do not receive any commissions, fees, direct compensation, indirect compensation, or any benefit from any outside individuals or companies. Although we gather information from sources that we deem to be reliable, we cannot guarantee the accuracy, timeliness, or completeness of any information prepared by any unaffiliated third-party. When specific investments, types of investments, products, or companies are mentioned, such mention is not intended to be a recommendation or endorsement to buy or sell the specific investment, solicit the business, or use that product. The author of this publication may hold positions in investments or types of investments mentioned in articles. This information should not be relied upon as the sole factor in an investment-making decision. Readers are encouraged to consult with professional financial, accounting, tax, or legal advisers to address their specific needs and circumstances.
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