Looking Forward

With the major market indices having sharply fallen from recent all-time highs (ATH), investor sentiment usually follows, and we’ve seen both the S&P 500 (SPX) and Nasdaq-100 (NDX) indices decline over the short-term since their most recent highs. The SPX has declined 10% since it’s most recent ATH (2/19/25), and the NDX has declined 14% in that same period. In the investing world, we refer to a decline of 10% or more as a “correction.”

I like those two indices as benchmarks as they give an appropriate vantage of the US stock markets, with the SPX being 500 of the largest US companies, from across all 11 sectors, from tech and real estate to healthcare and utilities. The NDX is heavier on the tech side, doesn’t include financial companies, and this index tends to put on display the more extreme volatility seen during periods like we are seeing now.

Some quick market history when it comes to declines:

• The SPX and NDX see corrections once every 1-2 years

• Bear markets (decline of 20% or more from ATHs) occur every 3-5 years

So, what happens after those corrections in the markets? We refer to those follow-on periods of market action is “forward returns,” which is simply the measurement of performance after a specific market occurrence.

Forward returns for those two indices, including 3-months, 6-months and 1-year after a correction:

• SPX: +4-6% after 3 months, +8-10% after 6 months, and +12-15% after 1 year

• NDX: +6-8% after 3 months, +10-13% after 6 months, and +15-20% after 1 year

Now consider the psychological… if the decline scares an investor out of the market, selling all their stocks to cash, when does that investor come back in? How much of the positive forward returns will be missed if one leaves the market and subsequently gets back into the market once it “feels better?”

There’s not a correct answer, because everyone is different. Different tolerance of risk (psychological), different capabilities to accept risk (cash flow, net worth, etc.), and different timelines (needing the money in 1 year versus 15 years).

Generally speaking, we insist that an investor weighs those aspects in their own life, and continues to define what their financial aperture is and is not.

Headlines about what major news and financial media say will happen are great for helping one reassess their personal situation, but those same headlines should be understood for what they are. Headlines are made to get clicks and reads, because those clicks and reads lead to more revenue. Personal finance is highly personal, so a more intimate assessment and conversation with someone you trust is paramount to navigating how to look forward to your future and how that relates to your money.

Start with your investment timeline. Short-term worry affecting long-term investments might counter the goals you’ve set off to achieve financially.

Purpose each of your hard-earned dollars in appropriate buckets (as discussed last week) so they build your financial resilience.

Emotion won’t get you to your goals. Action and planning will.