Trump's Reminder in the Financial Sector: Stock Market Insights
Navigating the stock market during tense geopolitical periods can be a rollercoaster ride, just like the one we experienced a few months back. With the Trump administration causing stirs, investors were forced to simplify and get back to the basics. Let's talk about one of those basics that deserves our attention.
At the end of this turbulent period in 2025, the S&P 500 recovered, bouncing back from a 20% slump at its April low. This isn't news, but it's a fact that bears repeating. In situations where there's no immediate liquidity need, panicking and selling stocks isn't wise. Rather, stay calm, distance yourself from emotions, and let the storm pass. The stock market, after all, tends to be bullish in the long term.
Investing during market downturns can pay off in the long run. The S&P 500, for example, has had negative returns only 26 years out of nearly 100, with the longest streak of consecutive declines being four years (1929-1932) and three years (1939-1941). While corrections do happen, on average, investors can expect to experience a bear market every 4.5 years, according to Claret Asset Management.
However, over the past 20 years, corrections of 10% or more have occurred half the time, and the pace is likely to be even faster in an economy moving from globalization to multipolar fragmentation or decoupling. Recovering from losses takes an average of 10 months when there's no recession, and longer during a recession (3.8 years on average, excluding the Great Depression of 1929).
One strategy to consider during these volatile times is dollar-cost averaging. Instead of investing a lump sum, investors can spread their investments over time, buying more when prices are low and fewer when they're high. This method smoothes out the average purchase price over time, reducing risk during bear markets while still potentially capitalizing on market upswings. However, it's important to note that this approach may not be ideal for short-term gains, especially in anticipation of a bull market.
Over long time horizons, research consistently shows that investing a lump sum outperforms periodic investing strategies. The main reason is that stocks tend to trend upward over long periods, and investing all capital at once maximizes exposure to this upward drift. For example, Warren Buffett and other noted investors have suggested that, given the choice, investors should invest cash into index funds immediately rather than spreading the investment over time.
While dollar-cost averaging reduces risk and volatility, it often leads to lower long-term returns compared to lump-sum investing. This approach is favored by those seeking to avoid the anxiety of market timing but may miss some upside due to its lower risk profile.
In contrast, lump-sum investing offers higher returns approximately 66% of the time, especially over long periods (decades), where short-term volatility is smoothed out by the market’s long-term growth. Investors who take the plunge and capitalize on the market’s long-term growth potential stand to accumulate more wealth over time.
Ultimately, the choice between lump-sum and periodic investing depends on one's risk-return-peace-of-mind relationship. Research indicates that lump-sum investing offers more significant long-term gains, but it also entails higher volatility in the short run. On the other hand, periodic investing provides psychological comfort, but the resulting lower returns may not be ideal for long-term wealth accumulation. As always, consult a financial advisor to determine which strategy best suits your needs.
During tense geopolitical periods like the one experienced in 2025, understanding the finance sector, specifically investing in the stock-market, becomes crucial. A strategy that could be beneficial during such volatile times is lump-sum investing, which offers higher returns approximately 66% of the time, especially over long periods, despite the higher volatility in the short run.
