How the S&P 500 behaves in a recession
The S&P 500 tracks 500 large U.S. companies that represent 80% of U.S. equity market value. Its performance is often synonymous with "the market," making it a core holding in 401(k)s, IRAs, and target-date funds.
The index typically sees significant declines during economic downturns. For instance, the S&P plummeted by 49% during the tech bubble burst in the early 2000s, by 57% during the Great Recession (2007–2009), and saw a swift 34% decline during the relatively brief COVID-19 crash in 2020.
What these historical insights suggest is that the current dip could be the tip of the iceberg. Investors could face serious financial setbacks.
Older investors might find their retirement nest eggs shrinking at the very moment they planned to rely on them, triggering anxiety and difficult decisions.
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Learn MorePanic? How to handle your investments now
As stock markets plummet, many investors' first instinct is to pull money out and stash it in cash or safer assets. But timing the market — trying to predict peaks and troughs — is notoriously challenging and typically backfires.
Instead, consider these smarter, more strategic moves:
- Stay diversified. Spread your investments across asset classes — stocks, bonds, cash, real estate — to mitigate risks. If one sector tanks, your entire portfolio won't go down with it.
- Evaluate your risk tolerance. Are you losing sleep over market swings? You might be overexposed to stocks. Consider shifting to bonds or other safer, income-generating investments to provide stability.
- Don’t stop investing. If you’re younger, a downturn can actually benefit your portfolio long-term as you can buy shares at discounted prices. Taking advantage of dollar-cost averaging as you continue to invest regularly means you're setting yourself up for greater returns when markets rebound.
Nearing retirement? How to protect your nest egg
If you're close to retirement, market turmoil feels particularly personal and understandably scary. A big market drop is devastating when you’re planning to rely on your investments soon. But panic selling can lock in losses permanently.
Instead, take proactive steps to safeguard your retirement funds,
- Review your allocation. Typically, as you approach retirement, your portfolio should shift toward lower-risk investments. Consider moving a larger portion into bonds, treasury securities or high-quality dividend stocks that tend to be less volatile.
- Maintain liquidity. Keep enough cash or easily accessible funds to cover at least two years of living expenses. This approach means you won't be forced to sell investments at unfavorable prices to meet immediate financial needs.
- Consider professional advice. If you don’t already have a financial advisor, now might be the time. A professional can provide personalized strategies tailored specifically to your retirement goals and comfort with risk.
Investors at every stage – whether young and growing their wealth or nearing retirement – can and should take proactive, thoughtful measures to recession-proof their portfolios.
Ultimately, the key is balance. Don’t overreact, but don’t underestimate the potential risks.
With strategic diversification, regular investment habits, and professional guidance, you can navigate the turbulence ahead, protecting your finances against the fallout from Trump's tariff turmoil.
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