2025: A Year of Uncertainty for Investors

Investors have experienced a rollercoaster of emotions in 2025, with the market swinging wildly from euphoric highs to dismal lows. The sell-off on Monday has left investors reeling, with the Nasdaq Composite (^IXIC 1.26%) plummeting over 20% from its 52-week high. The Dow Jones Industrial Average (^DJI 0.05%) and S&P 500 (^GSPC 0.74%) have also suffered significant declines, entering correction territory. Geopolitical tensions, tariffs, and trade wars continue to create uncertainty, sending shockwaves through the market. The specter of a potential recession looms large, casting a dark shadow over investor confidence. President Donald Trump’s pressure on Federal Reserve Chair Jerome Powell to lower rates has reached new heights, with Trump openly suggesting Powell should be fired. The independence of the Federal Reserve is a crucial check on the U.S financial system, and its ability to maintain fiscal and monetary policy balance is essential for maintaining global confidence in U.S. markets. A mistake in this regard could have far-reaching consequences for the economy and investor sentiment.

Embracing Uncertainty

A key lesson for investors during times of uncertainty is to recognize that past performance is not a guarantee of future success. A quote from Mark Twain, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so,” serves as a timely reminder of the importance of humility in investing. The reality is that no one can predict with certainty how long the current sell-off will last, whether the bottom has already been reached, or if there’s still more downside to come. Policies could change, and the market could return to making all-time highs. Alternatively, we might find ourselves in a prolonged bear market. Despite the uncertainty, history offers some comfort. The S&P 500 has never experienced a 20-year period with a negative total return. This means that even if you bought at the top right before a big crash, you would still come out ahead over 20 years. In the long term, buying stocks, whether they’re falling or rising, can be an excellent decision. The average annual return in the S&P 500 from 1928 to 2024 was 8%, and the total return (with dividends reinvested) was a 10% compound annual growth rate over the last 97 years. However, for investors with shorter time horizons or a more sensitive disposition to near-term market movements, buying the dip might not be the best strategy.

Focus on What You Can Control

Uncertainty and volatility are inherent elements of investing. As individual investors, we have the luxury of controlling where we invest our hard-earned savings and for how long, without the pressures that come with being a professional money manager. We don’t have to get caught up in the noise of a sell-off or worry about how our portfolios are doing relative to a benchmark. Ultimately, what matters most is achieving financial goals. Achieving financial goals means being true to yourself and investing in alignment with your personal risk tolerance and time horizon. By doing so, you can limit potentially regrettable investment decisions. For example, a young investor with a high risk tolerance and a multi-decade time horizon who’s saving for retirement might find buying beaten-down growth stocks on sale to be a great decision, even if those stocks fall further in the near term. However, a young investor saving for a big purchase in the near or medium term, like a car or a house, may not want to try to buy stocks with the intention of selling them in less than three years. On the other hand, a five-year time horizon investor nearing retirement may want to ensure their portfolio is balanced across value, income, and growth companies from different industries. Going full throttle by buying the dip only in growth stocks could lead to taking on more risk than necessary and jeopardizing investment objectives. Buying the dip in quality dividend stocks, industry-leading value stocks, and growth stocks, while ensuring no single position can make or break your portfolio, could be a better way to participate in the market while resting easy at night.

Taking Action to Limit Emotional Mistakes

The stock market is a place where time is the best tool for compounding wealth. The longer the time horizon, the more risk can be taken. However, taking on too much risk or investing in companies you don’t understand to make a quick buck is never a good idea. A portfolio review can be a helpful exercise during times of market volatility. Focusing less on the day-to-day price action and more on the reasons why you bought the stocks, exchange-traded funds, and/or index funds in your portfolio can help you stay grounded. Updating investment theses for your positions is another action you can take without necessarily buying or selling anything. Companies that are valued more for their potential than their existing results can be especially vulnerable to selling off if investors lose confidence in their growth trajectory or fear they have to wait longer for a story to unfold. Listening to upcoming earnings calls and management commentary can shed light on vulnerabilities to trade tensions. If a company with a strong balance sheet, manageable expenses, a good business model, and a reasonable valuation is selling off just because the broader market is going down, it could make the buy case even more compelling. If prolonged tariffs could severely affect a company’s financial health, it may be a good idea to revisit the position.

Where to Go from Here

There isn’t a universal “yes” or “no” answer for buying the dip. The decision comes down to what you already own, the cash you have available to invest, risk tolerance, time horizon, and your financial goals. For some investors, now could be a great time to buy. Others may find themselves overly exposed to risk. By understanding that there are nuances to investing, you can stay even-keeled and use volatility to your advantage, instead of getting overwhelmed when portfolio balances fall rapidly.