Tariffs, Inflation, Recession, Market Drop – Should We Be Worried?
Sanjib Saha
13 March 2025
Everywhere we turn, headlines scream about tariffs, inflation, and a looming recession. It’s enough to make any investor nervous. Should we sell? Should we invest in something else? What do we do?
Short answer for long-term investors who follow certain basic rules of investing: Tune out the noise and stay calm.
Stock market investment is for the long-term – money that you don’t need to cash out in several years. Market goes up over the long run, but it can be volatile and uncertain in the short term. Anxiety and nervousness are understandable, but that pain is the price we must pay for superior long-term investment returns from stocks.
These short-term market fluctuations should not derail anyone’s investment strategy, unless those basic rules of stock market investing are violated to start with. What rules? Any money that might be needed in a few years should not be in stocks, and investments must be sufficiently diversified. That’s it!
The bright side of such market turmoil: It’s an excellent opportunity to review the investment approach to ensure preparedness to navigate market volatility with confidence. Rather than panicking, long-term investors can take this time to revisit a few key aspects of their portfolio:
1. Is there enough cash or stable investments for short/mid-term financial needs?
Market downturn — especially a prolonged one — can be nerve-wracking and can cause serious damage if access to cash is needed while the market is down. Having a financial cushion ensures that investments won’t have to be sold at a loss during a market slump. This is where the first rule of stock investing comes into play – don’t put money that might be needed in a few years in stocks. The bigger the financial cushion, the longer downturn you can weather.
A good rule of thumb is to use the age, minus twenty, to decide the minimum percentage of stable investments in the entire portfolio. Want to sleep better? Raise the stable investments’ allocation all the way up to the age. Increasing further might be too conservative because it’d affect the growth of the overall portfolio.
2. Are the investments diversified well?
Diversification is one of the most powerful tools for managing risk. A well-diversified stock portfolio — we’re talking about investing across different companies, industries, countries and so on — spreads investment risks and reduces the impact of a downturn in a specific country or sectors.
If investments are concentrated in a few stocks or a few sectors, now is a good time to reconsider such decisions and internalize the inherent risks associated with undiversified investments. A few low-cost, well diversified, broad index funds across the globe is a hard portfolio to beat.
3. Does the current asset allocation reflect the risk tolerance?
Investors over-estimate their risk tolerance when the market is soaring. They unknowingly end up taking much more risk than they can stomach. Market fluctuations like what we’re seeing today are excellent opportunities to truly assess the risk tolerance. Is the market volatility is causing sleepless nights? When the dust settles, consider reducing your stock allocation to align with your risk tolerance. But wait until the market recovers, or otherwise you’d be locking in unrecoverable losses by selling in a down market.
Taking Advantage of Down Markets
While downturns can be unsettling, they also offer opportunities to buy stocks on sale, rebalance or repair portfolio, and optimize taxes:
- Buying at lower prices: Market dips allow for the purchase of quality investments at a discount, setting the stage for future gains when markets recover.
- Rebalancing the portfolio: Market swings can throw asset allocation off balance. If stocks have fallen, rebalancing by shifting funds from bonds or cash back into equities can help maintain the target allocation.
- Tax-loss harvesting: Selling investments at a loss can help offset taxable gains, reducing the overall tax burden. For those in a higher tax bracket, this can be a valuable strategy.
- Substituting bad investments for better ones: Stuck with an expensive, low-performing fund because of the tax consequences from the unrealized gains? Now might be a better to time sell and minimize the loss, and use the proceeds to buy a replacement fund that’s highly correlated with the original investment.
- Roth conversions: If income is lower due to a downturn, converting a portion of the tax-deferred retirement account to Roth could be more tax-efficient, allowing for tax-free growth and tax-free withdrawals in the future.
The Bottom Line
Short-term volatility is an inevitable part of investing, but it shouldn’t dictate a long-term strategy. Instead of reacting to every headline, these moments provide an opportunity to assess portfolios, ensure proper diversification, and seize opportunities for growth and tax efficiency.
By staying the course and making informed adjustments, long-term investment success can be achieved—regardless of what the headlines say today.
Happy investing!