NEW YORK (AP) – When the stock market is as crazy as it has been recently, it’s natural to want to do something to protect your retirement savings. Historically, though, staying calm is usually best.
The US stock market has a record of recovering from any severe downturn. Whether it’s a global financial crisis, a trade war or a military conflict, the S&P 500 has so far recovered its losses to set new records. Of course, it takes years, but anyone who takes their 401(k) investment out of stocks risks losing out on recovery and other gains.
Will it happen again? No one can say for sure, and this time some things are different. But many professional investors and strategists stick to the advice they usually give: As long as it’s money you don’t need quickly, which should never be in stocks in the first place, try to be patient and go through the stock market changes, as hard as it is.
They gave the same advice when President Donald Trump unveiled his global tariffs on “Independence Day” last year, after inflation skyrocketed in 2021 and after COVID ravaged the global economy in 2020. Absorbing such shocks is the price of entry to the large returns that stocks can offer over the long term.
“Although volatility may feel uncomfortable, it may pick up from here, and may lead to near-term declines in stocks, volatility itself is short-lived when it reaches extremely high levels,” according to Anthony Saglimben, U.S. market strategist. “And more often than not, extreme volatility provides investors with a long-term entry point to buy stocks rather than sell them.”
The war in Iran is slowing the world’s oil flow and causing severe volatility in markets.
The conflict has blocked much of the traffic in the Strait of Hormuz, a narrow waterway off the coast of Iran through which a fifth of the world’s oil passes each day. It has raw material storage tanks in the area that it fills up because it has nowhere else to go. And that’s prompting oil producers to say they’re cutting output.
Oil prices briefly fell to around $120 a barrel on Monday, the highest since the summer of 2022, on concerns that production problems will continue for a long time. Some analysts say prices will soon reach $150 if the straitjacket remains closed.
A prolonged period of high oil prices could lead the global economy to a worst-case scenario called “stagflation.” This is what economists call it when growth stagnates yet inflation is high. It’s an unfortunate combination that Federal Reserves and central banks around the world are ill-equipped to address.
The S&P 500 is just 4% below its all-time high, which was set in January as of Thursday morning. It feels bad because of how quickly stock prices have changed recently, often hour-to-hour as well as day-to-day.
Several times since the start of the Iran war, the Dow Jones industrial average has dropped about 900 points in the morning, only to recover or come close to it later in the day.
The US stock market doesn’t often behave this way, but it has a regular history of taking big losses before rebounding.
The S&P 500 has seen declines of at least 10% each year. Such declines are so common that professional investors have a name for them: “corrections”. Often, experts see them as dampening optimism that could otherwise cross the board and send stock prices soaring.
Selling your stocks or moving your 401(k) investments out of stocks and bonds may offer a smaller chance of seeing a big drawdown. But exiting the market will mean figuring out the right time to get back in, unless you’re willing to give up future recoveries and gains.
And timing the market correctly is always difficult. Some of the best days in U.S. stock market history were clustered in the middle of the crash.
Just last Monday, anyone who sold when the S&P 500 fell 1.5% in the morning would lose when the index rebounded in the afternoon. It ended with a gain of 0.8%.
Some recoveries take longer than others, but experts often recommend not putting money into stocks you can’t afford to lose for several years, up to 10. Emergency funds, for home repairs or medical bills, should not be invested in stocks.
Apps on smartphones have made trading easier and cheaper than ever before. This has helped attract a new generation of investors who may not be accustomed to such wild swings in the market.
But the good news is that young investors often have the gift of time. With decades leading up to retirement, they can ride the wave and let their stock portfolio recover before hopefully building and eventually growing even bigger. For them, a fall in prices may be like a stock sale.
Older investors have less time to recoup their investments than younger ones.
People who are already retired may want to reduce spending and withdrawals after a sharp market decline, as large withdrawals will remove more potential compounding ability in the future. But even in retirement, some people will need their investments to last 30 years or more.
You don’t need to pay that much attention to each of these. A defined benefit pension, which few US workers still have, means you’re in line to receive a defined payout no matter what the stock market does.
When stocks fall, the prices of Treasury bonds and gold often rise as investors turn to investments considered safe. That’s why many advisors recommend holding a diversified portfolio to help smooth out shocks.
This time around, though, Treasury prices have been hurt by high oil prices and concerns about inflation. Gold prices also sometimes struggle when Treasury bond yields rise. This is because gold, which pays nothing to its investors, looks less attractive when Treasuries are paying more in interest.
No one knows, and don’t let anyone else tell you.
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AP writer Cora Lewis contributed.
