Markets Go Up. Markets Go Down. Here’s What to Do About It.
Investments Series
There’s a version of investing that most people imagine before they actually start doing it. The market goes up steadily, their portfolio grows, and sometime in the future they retire comfortably. It’s a reasonable picture. It’s also incomplete.
The real version includes years like 2022, when both stocks and bonds lost money simultaneously. It includes the financial crisis of 2008, when the S&P 500 fell 57%. It includes the dot-com crash, COVID, and a correction of 10% or more that happens, on average, every single year.
Understanding that the real version is the only version - and knowing what to do about it - is the foundation of sound investing.
The Most Important Chart
When we sit down with clients to talk about investing, one of the first things we walk through is a simple historical picture of the S&P 500. We like it as it shows the 500 largest publicly held companies in the United States, which is a better proxy for the broad market than the Dow Jones, which tracks only 30 stocks.
In 1997, the S&P 500 stood at roughly 741. As of this writing, it sits around 7533 . But it didn’t grow in a straight line - it’s a line that drops 49% during the tech bubble, falls 57% in the financial crisis, loses 34% during COVID, and sheds 25% when inflation spiked and the Federal Reserve responded aggressively. But the long-term direction, over nearly three decades, is unmistakably upward.
Here's an even more useful framework: rather than focusing on any single year, look at rolling 20-year periods. According to J.P. Morgan's Guide to the Markets, annualized S&P 500 returns over rolling 20-year periods from 1950 through 2025 have ranged from 6% to 18%. While the journey has included bear markets, recessions, and periods of uncertainty, investors who remained invested over long periods have historically benefited from the market's long-term growth.
We tell clients: long-term investing is the opposite of gambling. In gambling, the law of large numbers works against you - over time, the house wins.
Corrections Are Normal. Panic Is Optional.
Here’s a number that surprises most people: the market experiences a correction of 10% or more, on average, once every year.
A correction is defined as a 10% decline from peak to trough. A bear market is a 20% decline. Both feel alarming when you’re living through them. Both are, historically speaking, completely normal.
What makes them dangerous isn’t the decline itself. It’s what people do in response to it.
Markets typically drop sharply and recover. The investors who sold during the dip locked in their losses. The ones who stayed the course captured the recovery.
Timing the market requires getting two things right: when to get out, and when to get back in. History shows that most people get both wrong - they sell near the bottom when fear is highest, and they buy back near the top when confidence has returned. This is the opposite of buying low and selling high.
There’s a counterintuitive relationship worth understanding here. When consumer confidence surveys show people at their most pessimistic about the economy, the market’s average return over the following 12 months tends to be significantly higher than average. When confidence peaks, the following returns tend to be modest. Fear, in other words, can often be a better buy signal than optimism.
What Psychology Has to Do with It
The investment business is, in many ways, a psychology business.
We work hard to be genuinely knowledgeable about markets, investment vehicles, and portfolio construction - that craft matters enormously. But the knowledge is only useful if clients can stay the course when things get uncomfortable. And that requires a different kind of work: education, honest conversation, and building the kind of trust that lets a client hear “this is normal, and here’s why” rather than “I need to get out now.”
We spend significant time on the front end of a client relationship going through historical examples, walking through what markets have done in the past, and preparing people for the shape of the journey ahead. A client who has heard multiple times that the market corrects on average once a year responds differently when that correction arrives than one who encounters it without context.
The goal is to be the financial equivalent of the flight attendant who stays calm during turbulence - not because turbulence isn’t real, but because they’ve seen it many times and know it ends. Clients take cues from how their advisors respond to difficult moments. Our job is to be steady.
Risk Tolerance Is a Moving Target
One of the more nuanced parts of the psychology conversation is that how someone feels about risk changes over time - and not always in the direction you’d expect.
When markets are performing well and portfolios are growing, clients often express higher risk tolerance. When markets drop, the same clients sometimes feel much more conservative than they thought they were.
We watch for this carefully. We read body language in meetings. We listen for what’s being said and what isn’t. And we have direct conversations: this portfolio carries real risk. A conservative allocation still has meaningful exposure to market movements. We want clients to understand what that means before we experience it together, not after.
Risk tolerance also changes genuinely as people age and their time horizons shift. A 35-year-old with 30 years before retirement can afford to ride out significant market declines - and historically, staying invested through those declines has been rewarded. A 65-year-old drawing down their portfolio has less runway to recover. The portfolio should reflect that reality, and it should be revisited as circumstances change.
The One Thing That Doesn’t Change
Across all of it - bull markets and bear markets, corrections and recoveries, different life stages and different risk profiles - one principle holds.
Time in the market matters more than timing the market.
The investors who have benefited most from the long-term upward trajectory of markets are the ones who started early, stayed consistent, and resisted the urge to act on short-term fear. The power of compounding - money generating returns on its returns, year after year - is one of the most powerful forces in wealth building. But it requires patience and consistency to work.
If you’re investing in your thirties, the market’s long-term direction is your ally. If you’re approaching retirement, the same history that produced difficult years also produced the recoveries that followed them. Understanding both is what allows investors to stay in the game long enough for the game to work in their favor.
Rawe Financial is a family-owned financial advisory practice in Northern Kentucky, helping individuals and families build and protect wealth at every stage of life. If you have questions about your investment strategy, we’d welcome a conversation.
Disclosure
This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
Investments are subject to risk, including the loss of principal. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions.
All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.