NEW YORK (AP) — When stock markets are as frenetic as they have been recently, it’s natural to want to do something to protect your retirement savings. However, historically it has been best to stay calm.
The US stock market has a history of recovering from every steep decline it has suffered. Whether it was a global financial crisis, a trade war or a military war, the S&P 500 has so far always recovered its losses to advance to new records. Of course, that could take years, but anyone who pulled their 401(k) investments out of stocks risked missing out on the recovery and future gains.
Will that happen again? No one can say for sure and this time some things are different. But many professional investors and strategists follow the advice they often give: As long as it’s money you don’t need anytime soon, which should never be in stocks in the first place, try to be patient and ride out the swings of the stock market, no matter how tough it may be.
They gave the same advice after President Donald Trump unveiled his global tariffs on “Liberation Day” last year, after inflation soared in 2021, and after COVID crashed the global economy in 2020. Withstanding these types of shocks is the price of admission for the highest returns that stocks can offer over the long term.
“While volatility may seem uncomfortable, it could escalate from here and possibly cause stocks to decline in the short term, volatility itself tends to be short-lived when it reaches more extreme levels,” according to Anthony Saglimbene, chief market strategist at Ameriprise. “And in most cases, extreme volatility provides investors with a solid long-term entry point to buy stocks rather than sell them.”
The war in Iran is slowing the global flow of oil and causing extreme swings in the markets.
The fighting has halted most traffic in the Strait of Hormuz, a narrow waterway off the coast of Iran through which a fifth of the world’s oil passes on a normal day. That causes crude oil storage tanks in the region to fill up because it has nowhere else to go. And that is prompting oil producers to say they are cutting production.
On Monday, oil briefly spiked to nearly $120 a barrel, the highest price since summer 2022, on concerns that production problems could last for a long time. Some analysts say prices could quickly reach $150 if the strait remains closed.
A long period of high oil prices could put the global economy in a worst-case scenario called “stagflation.” That’s what economists call it when growth stagnates but inflation remains high. It’s a miserable combination that the Federal Reserve and central banks around the world don’t have good tools to fix.
As of Thursday morning, the S&P 500 is just 4% below its all-time high, which was set in January. You feel worse because of how wildly stock prices have swung recently, often hour to hour and also day to day.
Several times since the start of the war with Iran, the Dow Jones Industrial Average has plunged approximately 900 points in the morning only to erase its loss later in the day or come close to it.
The US stock market doesn’t tend to behave exactly like this, but it has a regular history of declines and steep losses before rising again.
The S&P 500 has seen a drop of at least 10% or so each year. These declines are so common that professional investors have a name for them: “correction.” They are often seen by experts as removing optimism that might otherwise boil over and drive stock prices too high.
Selling your stocks or moving your 401(k) investments from stocks to bonds may offer fewer chances of seeing big declines. But exiting the market would also mean having to find the right time to re-enter, unless you are willing to give up any future recovery and gains.
And it is always difficult to time the market correctly. Some of the best days in the history of the American stock market have been clustered between crises.
Last Monday, anyone who sold when the S&P 500 fell 1.5% in the morning would have missed out when the index rose again in the afternoon. It ended with a gain of 0.8%.
Some recoveries take longer than others, but experts typically recommend not investing money in stocks that you can’t afford to lose for several years, up to 10. Emergency funds, for things like home repairs or medical bills, should not be invested in stocks.
Apps on smartphones have made trading easier and cheaper than ever. That 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 younger investors often have the gift of time. When retirement is decades away, they can afford to ride the waves and let their stock portfolios recover before compounding and eventually growing even further. For them, price drops can be almost like stocks going on sale.
Older investors have less time than younger ones for their investments to recover.
People who have already retired may want to reduce spending and withdrawals after sharp market declines, because larger withdrawals will eliminate more potential ability to compound in the future. But even in retirement, some people will need their investments to last 30 years or more.
You don’t have to pay that much attention to any of this. Defined benefit pensions, which few American workers still have, mean that you are in a position to receive a defined payment regardless of what the stock market does.
When stocks fall, the prices of Treasuries and gold often rise as investors shift to investments that are considered safer. That’s why many advisors suggest maintaining a diversified portfolio, to help soften shocks.
This time, however, Treasury prices have been hit by concerns about high oil prices and inflation. The price of gold has also struggled occasionally when Treasury yields rose. This is because gold, which pays nothing to its investors, appears less attractive when Treasury bonds pay more interest.
Nobody knows and don’t let anyone tell you otherwise.
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AP writer Cora Lewis contributed.
