Navigating 2025’s market volatility: A guide for long-term investors

The first four months of 2025 have tested the resolve of many a 401(k) investor.

A sharp drop in the S&P 500 along with abrupt swings in interest rates can cause long-term investors to make mistakes. Understanding the nature and history of market volatility — and employing sound strategies to combat it — make it much easier to weather such a storm.

After peaking on Feb. 19 this year, the S&P 500 sunk 21% by April 8 amid fears of recession brought on by the threat of massive tariffs. Meanwhile the yield on the 10-year Treasury climbed to 4.79% early in the year, only to fall all the way down to 3.9% by April 3 as recession fears mounted. Currently, both U.S. stocks and interest rates have rebounded somewhat from their lows.

Since 1932, a bear market, defined as a drop of 20% or more from a market high, has occurred on average 2½ times a decade. A “correction,” defined as a drop of 10% or more from a market high, has occurred every 18 months on average. In recent times, bear markets last on average between 10 to 13 months but have been as short as 33 days (in early 2020) or as long as 2½ years (from March 2000 to October 2002).

The average total decline during a bear market also varies widely but averages around 35% to 40%. Some, typically those associated with a deep recession, have seen much steeper declines: The Great Depression saw losses of more than 80% while the recessions of 2000-02 and 2007-09 saw drops of about 50%.

Behavioral scientists have demonstrated the average investor derives about three times the pain from a loss as they derive pleasure from a similar sized gain. This goes a long way to explain why so many sell at the first whiff of trouble.

The country’s fractured political climate isn’t helping matters. According to consumer confidence data the University of Michigan collected, party affiliation has a large impact on economic outlook. It turns out people feel meaningfully more optimistic when their favored party holds the White House, regardless of actual economic conditions. Now let’s apply this phenomenon to some hypothetical investment decisions.

If you had $1,000 to invest in the S&P 500 Index each year since Jimmy Carter took office (1977) but only invested in years when a Democrat held the Oval Office, your account would have grown to $217,900 by the end of 2024. During this same 48-year timeframe, if you had invested only when a Republican was president, your account would have grown to $67,803. If you kept your political views apart from your long-term investment decisions and simply invested $1,000 every year regardless of which party held the Office, your account would have grown to $1,858,487.

One of the best strategies to combat the natural human tendency to try and time the market is diversification. By spreading your investments across a number of different asset classes, such as stocks, bonds and “real” assets, you greatly reduce your risk from any one economic event (inflation/recession/natural disaster) destroying your long-term investment returns. The younger you are, the more you allocate to risk assets, while the closer you are to needing the money, the more you allocate to bonds and other income-producing assets. Diversification places your portfolio in a position to benefit from multiple sources of economic growth, and you’re also likely to experience a much steadier return stream, which lessens the roller-coaster ride that so negatively affects so many investors.

Rebalancing is a strategy that allows investors to keep their portfolios’ risk/return profile in line with a given target. As one asset in your diversified portfolio does extremely well, or poorly, you sell some of the outperforming asset to buy more of the underperforming asset. I especially like the opportunistic aspect of this strategy, which allows you to pounce on an underperforming asset you love at an extremely attractive price and forces you to sell a portion of an asset when it shoots up in value, thereby prompting you to do what hardly anyone has the self-discipline to do: buy low and sell high.

Market volatility like we’ve been experiencing recently is only a problem for investors without a plan. With the proper strategy in place, market volatility can be used to your advantage, and instead of something to dread, it becomes something that presents opportunity. If you don’t have such a strategy, I suggest you consult with a financial advisor to help you tailor one to your specific situation and risk tolerance.

Remember, while bear markets historically last 10 to 13 months, bull markets last five years on average. So stay invested.

Michael J. Francis is president of Francis LLC, a registered investment adviser with offices in Minneapolis and Brookfield, Wis. Francis can be reached at michael.francis@francisway.com. The information contained herein is provided for informational purposes only.