Why We Don't Sell in a Downturn

I want to take you back to April 2025 for a second….Trump announces his plans to tariff basically everyone on earth and the market panicked.  The velocity with which the market fell was rare. In just a few weeks time the market fell nearly 20% and it may have felt like the sky was falling in that moment. Lots of so-called "experts" were sounding the alarms and predicting more pain ahead. Talking heads on our TVs were predicting recession, runaway inflation, enormous job losses and further declines in the stock market. But in my newsletter to clients back in mid-April I showedTHIS CHARTwhich gave us a peek at what had happened in the months and years following previous declines of similar magnitude.

What the chart showed us was that the market had never been lower over a 1, 3, 6 or 12-month period following a decline of 15-20% going back to 1950. If we could just ignore all of the noise happening around us and focus on the data, history was sending a pretty clear signal:

Large pullbacks are not a time to sell, because forward returns from those low points tend to be quite strong.

I pointed out in that April update that the average 6-month return following these previous pullbacks had been 26% and the average 12-month forward return following similar pullbacks had been 31%. Pretty darn strong.  Knowing this, it seemed that a prudent strategy was simply to stay invested and give our investments time to recover just as they had in the past.  Or, if you're younger and still contributing to your retirement accounts, it was a great opportunity to allocate new dollars into the stock market at bargain prices.  No matter your stage in your investment journey, selling was not a sound decision.  

Well, we’re now about 5 months since the market bottomed….so let’s see how things have gone since then:

The S&P 500 is up more than 31% and making new all-time highs.

As I always say…..Past performance is no guarantee of future results. Nothing in the market is predictable or certain. But history does have plenty of lessons to teach us to aid in our decision making if we know where to look. And the lesson history had for us this time was simply that selling during a sharp downturn has not been a wise decision and patience has typically been a sound strategy. So far, that strategy of patience has certainly paid off. This is why I constantly preach that as investors it’s important we ignore the noise which can get very loud when the markets get volatile.

Keep this in mind when the next crisis-du-jour arrives and everyone around you is sounding the alarms.