Stock market volatility. Thoughts and opinions about how to manage it are everywhere: in the newspaper, in newsletters, on social media and on the radio. Despite my usually laissez-faire attitude about market movements, it feels impossible to write a newsletter and ignore it. I’ve had many conversations with clients about the stock market over the past few weeks – it’s a top concern. One has to “read the room”, as they say.
It is a little surprising to me just how many people are writing about this topic and especially how dramatic they make it out to be. Let’s put this market decline in perspective. If you’ve been investing in the US stock market these past few years, you have had some ridiculously good returns. In 2024, the US market was up 25%, in 2023 it rose 26%. That’s a 50% increase in just two years. Over the five-year period ending in December of 2024, the value of money invested in the S&P 500 doubled. Doubled! Seriously, you should be really happy.
And what’s happening now? So far in 2025 the US market is down about 4% and 9% since the end of January. This feels really bad mainly because of the juxtaposition of how good it has felt prior to this. Account values had been going up pretty consistently week to week. And now we are incensed that our investment are going down for several days in a row – how dare the stock market treat us like this?
Now let’s be clear about something: the long-term return of the US stock market has been about 9.5% annually over the past 20 years. Compared to the 15% annual return we’ve had in the last five years and even the 13% average return we’ve had over the past ten, it seems pretty clear that these have not been normal times.
Have we been spoiled? Yes. Is it a surprise that we have to give back some of our gains? No.
The Canadian market hasn’t been quite so spectacular but it’s also been good to us. The S&P/TSX Composite Index was up 23% in 2024 and 12% in 2023 for a total of 35%. Over the past five years, the Canadian market gave us a 70% return. Considering the long-term return of the Canadian stock market has been about 7.5%, we’ve been coddled as investors.
What’s the worst-case scenario for stock markets? I have no idea. But the last two major downturns were in 2007-2009 when the US market fell by 54% from its peak to its lowest point, and in 2000 when the US market fell by 40% over a three-year downward grind. This might help to set your expectations about what a very bad market looks like. Whether it happens or not is anyone’s guess.
Whenever I start working with a new client who wants to invest for themselves, I always review the long-term stock market chart with them. (You can see my chart here.) I do this to make sure they know that the stock market delivers a brutal punch to the gut every now and then and that investors, especially those who manage their own money and who don’t have anyone to hold their hand through these difficult times, need to remember not to panic – that markets have always recovered. For all of you who have had this conversation with me over the past few years, now is the time to revisit this long-term chart and remind yourself of your investment time horizon.
You might also be encouraged by the fact that stock markets rarely decline two years in a row. In the US and Canada, this hasn’t happened since the tech bubble. Generally, a bad year is followed by a recovery.
There is really only one thing that can protect you from the ravages of a stock market decline: an appropriate asset allocation.
If you’ve set up your portfolio properly, you have nothing to worry about. When you choose your allocation to cash, bonds and stocks, you must pay attention to your investment time horizon. This is the number one consideration when deciding how much to invest in the stock market. If the money invested in the stock market is your long-term money, then who cares about a 10% market decline? Or even a 20% or 30% decline? Markets historically have regained their value within a few years of a big decline so whatever – just wait it out. Your short and-medium-term money isn’t in 100% stocks (right?) and any money you need within three years is in cash (right?) so let the other investments do their thing. You took the time to set yourself up properly.
As for me, I’m not at all worried. My retirement money is invested 100% in the stock market – except for a small amount in cash – and even if it goes down a lot, I’m ok. (Of course it won’t feel good, but I will stop checking my account, something I’ve done before when markets were tanking.) My kids' RESP has about 50% of its value in GICs and money market funds because my son is heading off the university in September and my other son is two years behind. Let the market do its worst to the other half – I’ve got enough sitting safely to pay their costs for a few years.
If a falling stock market is getting you down, there are a few tactics that can help you. For one, stop looking. Delete the app for your online brokerage and don’t check your account daily, or even weekly. Reframe the decline in your investments as giving back the nice gains you’ve had instead of seeing them as losses (if in fact you had gains before losses). And lastly, if you are feeling a lot of anxiety, then you probably don’t have the right asset allocation. Maybe you over-estimated your tolerance for volatility. Instead of a knee-jerk reaction, really consider how much of a decline you can stomach. Then rebalance your portfolio and leave it alone.
For me, there is a morbid fascination in watching a market crash. I’ve watched a few of them over my 25 year history as a self-directed investor and as a stock market analyst. In the worst of it, it feels like “it’s different this time”, but it never is. The market always recovers.
Photo by Dirk van Wolferen on Unsplash
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