A new client called me on a Monday morning in March, six weeks into a market drawdown that had wiped roughly fifteen percent off his portfolio. The voice was tight. He did not want to talk about the long term. He wanted to know whether he should move to cash and wait this out.
I asked him a question that has saved more retirement plans than any specific piece of advice I have ever given. What did your plan assume would happen?
The honest answer is the one most people have not thought through. The plan assumed that markets would deliver something close to their long-term average return. The plan did not assume the return would be delivered evenly. Nothing about market history would suggest that. The plan, in fact, was built on the explicit understanding that there would be years like this one. There always are.
What the data actually shows
Over the past century, the S&P 500 has experienced a drawdown of ten percent or more in roughly half of all calendar years. Drawdowns of twenty percent or more have occurred in about one year in five. None of this is unusual. None of it is the market behaving badly. This is what owning equities looks like, observed at the resolution of a single year.
The interesting numbers come when you change the resolution. Over rolling fifteen-year windows since 1926, the S&P 500 has delivered a positive return in every single window. Over rolling twenty-year windows, the lowest annualized return was around six percent, and the average was closer to ten. The path is volatile. The destination, for someone who stays on it, has been remarkably consistent.
The cost of trying to avoid the bad days
A common reaction in a drawdown is to try to step aside until the worst is over. The intent is reasonable. The execution is almost impossible. Because the best days and the worst days in any market cycle tend to cluster within weeks of each other, the investor who sells after a sharp decline usually misses some of the strongest recovery days while waiting for the all-clear. The all-clear, of course, never comes with a bell.
The math of missing those days is unforgiving. The chart below shows what would have happened to $10,000 invested in the S&P 500 over the past thirty years under five scenarios: staying invested every single day, or missing only the very best ten, twenty, thirty, or fifty days during that entire thirty-year period. The result is not subtle.
$10,000 invested in the S&P 500, 30 years, by missed best days
Missing only the ten best days, out of roughly seventy-five hundred trading days, cuts the outcome by more than half. Missing the best fifty leaves you barely above where you started after three decades. And the days in question are not predictable in advance. They are the days the market rallies hardest, which is typically the days the headlines feel worst.
The clustering problem. Seven of the ten best market days in the past two decades occurred within two weeks of one of the worst days of the same cycle. An investor who sells after a sharp decline and waits for clarity is, statistically, sitting out the recovery they were hoping to participate in.
What we do instead
The discipline that produces long-term outcomes is not heroic or complicated. It is unflashy. We build the plan to accommodate drawdowns before they happen. We talk through what a thirty percent decline would feel like before there is one, so the conversation is not happening in the middle of the storm. We hold cash reserves so that no one is forced to sell into a bad market to fund living expenses. We rebalance when the portfolio drifts, which mechanically buys what is down and sells what is up.
None of this is exciting. None of it is what makes a good story at a dinner party. It is also, with remarkable consistency, what produces the returns the markets actually offer.
The investor’s chief problem, and even his worst enemy, is likely to be himself.
Benjamin Graham, The Intelligent Investor
What to do when the next one comes
The next drawdown is on its way. We do not know when. We do not know how deep. We know with very high confidence that it will happen, because it always has. When it does, the question worth asking is not what the market is going to do next. It is whether your plan was built with this moment in mind.
If the answer is yes, then the right action is to do nothing different. The plan already accounts for what is happening. The cash reserves are there. The allocation is appropriate. The drawdown is uncomfortable but expected.
If the answer is no, then the right action is not to react to the drawdown. The right action is to use the discomfort as the prompt to build a plan that will not put you in this position again. The worst time to sell is in a drawdown. The right time to build a better plan is also during a drawdown, when the cost of not having one is most visible.
Volatility is not the enemy of long-term returns. It is the price of admission. The investors who do best are the ones who knew the price going in.
