Like a bicyclist with the wind at their back, being a stock market investor has been relatively easy over the last six years. Since the bottom of the COVID moment in mid-March 2020, the S&P 500 is up more than 200% – roughly 20.3% per year!
It has not been entirely smooth sailing, of course. Both stock and bond markets suffered substantial declines in 2022 as the Russia-Ukraine war broke out and inflation topped 9%. The markets rebelled against tariff announcements in 2025, and most recently, we’ve seen volatility surrounding the Iran War.
Still, even with these three episodes, this period has been unusually easy.
A Hard Truth
I’m here to tell you the stock market will decline by 20%.
It might be next quarter, next year, or five years from now, but it will happen. It will likely occur at a time you don’t expect, in a way you don’t expect, and for reasons that are multi-faceted and only clear in hindsight.
The question is: are you prepared?
Why So Negative?
Why am I being so negative? Because setting expectations is important for long-term investors. When we’re shocked and surprised, we’re far more likely to abandon our plan.
If I walk into a haunted house knowing it’s haunted, I still might get scared – but I won’t bolt for the exit. If I walk into a house only later to discover it is haunted, my fight-or-flight kicks in, and I won’t be too concerned about what window I break on the way out.
Expectation-setting matters.
Bear Markets vs. Corrections
A couple of definitions are in order. A correction is defined by a 10% decline, while a bear market is defined as a 20% decline.
So why focus on a bear market?
While a correction might incite fear, a bear market tends to incite panic.
Rational, disciplined investors often view a 10% pullback as a buying opportunity. Those same investors might have impulses to completely abandon ship when losses reach 20%.
A Bit of History
Historically:
The market is negative roughly one out of every 3-4 calendar years.
The market experiences a 20% (or greater) peak-to-trough decline roughly every five years.
Let’s briefly review the most recent declines that are near that level.
- February 2025 – April 2025: Declined 19%
The tariff announcements of last year caused panic in the market, with markets dropping nearly 20% in about six weeks. While this was a sharp, painful drop, markets recovered to previous highs by late June. An investor who put money in at the top (February 19th) and fell asleep for 5 months woke up with a portfolio that increased in value.
- January 2022 – October 2022: Declined 25%
The year started with the Russia-Ukraine war, and the largest market story was inflation surging to well over 9% (the highest since the 1980’s), while the Fed tried to combat this by aggressively hiking interest rates. This plunged stock and bond prices alike.
2022 vs. 2025
While 2022’s decline wasn’t substantially more than the tariff drama of 2025, it felt entirely different. The decline in 2022 was more like a slow bleed, and investors had time to digest the pain. I received many more calls in 2022 than I did in 2025.
When something is quick, the pain isn’t as bad. When my kids ask me to pull off a band-aid, I tell them I’m going to rip it off fast. The pain lasts only for an instant. Slowly peeling it off only prolongs the discomfort.
Even so, 2022 was relatively short-lived. The market recovered much of that year’s losses in 2023, followed by a very strong year in 2024.
Investor Complacency
What do I fear? I fear investor complacency. Investors have been a bit spoiled over the last six years. There has been some real volatility (2022, briefly in 2025), but nothing that truly tests the mettle of investors.
Action Steps
So, what should investors do?
- Acknowledge the reality. The market will test your resilience.
- Assess your true comfort level. Be honest with yourself. What does your “game film” show? Have you made emotional investment mistakes in the past? Are you going through a life transition? (Risk tolerance often declines during major life transitions.)
- Trust professionals. A good advisor is trained not only to build resilient portfolios, but also to navigate market declines and the human emotions that come with them. If your advisor has earned your trust, lean on that relationship.
The Next Bear Market
Where will the next bear market come from? It might be driven by a global health event, a debt crisis, a war, a recession, or a valuation pullback. We don’t know.
But two things are certain:
- The stock market will decline by 20% at some point in the future.
- The stock market has dramatically outpaced bonds, real estate, and precious metals over the long-term.
#2 is only possible because of #1.
Stocks deliver optimal long-term returns precisely because they are volatile. That volatility is the price of admission for excess returns.
We’re here to talk through this, so please reach out if you’d like to discuss your portfolio, drawdown expectations, or if you have any questions.
Blaine Carver
Private Wealth Advisor
