Invest in the Long Term
Here, we’ve assembled some charts that help make the case for staying invested. While we haven’t seen enough supportive evidence to call for a short-term tactical low in stocks (though we’re getting closer), for investors willing to hold for over a year, the rewards should outweigh the risks. In fact, if you believe, as we do, that recession will be averted this year and a correction (10–19% decline in the S&P 500) is more likely than a bear market decline of 20% or more, then the upside potential over the next nine to 12 months may be as much as double the downside risk. Our year-end fair value S&P 500 target range of 6,275 to 6,375 is about 14% above Tuesday’s close at the midpoint.
Pullbacks Are Common
The S&P 500 has just experienced its first 5% pullback of the year. As we write this, the S&P 500 is 8–9% below its all-time high. On average, the index experiences three drawdowns of between 5% and 10% each year. In fact, the S&P 500 has had at least one 5% pullback in 94% of years going back to 1928 (including its predecessor S&P 90 Index).
S&P 500 Pullbacks of 5–10% Are Quite Common
Source: LPL Research, Bloomberg 03/11/25
Disclosures: Indexes are unmanaged and cannot be invested in directly.
Past performance is no guarantee of future results.
On average, stocks see a correction of over 10% about once per year — with many of them coming in positive years. Expressing this data another way, the S&P 500 has had at least one 10% correction in 64% of years since 1928. With no corrections in 2024, we were probably due for one, especially considering all the good news that was priced into stocks coming into this year (as we wrote about in our Outlook 2025: Pragmatic Optimism). Knowing these corrections tend to come every year may not make you feel that much better in the moment. But when you consider that stocks have averaged a 13% annual return since 1980 despite the volatility along the way, measured by the S&P 500, the message is clear. Be patient, stay invested, and most importantly, don’t panic.
Stocks Drop 10–20% About Once Per Year on Average
Source: LPL Research, Bloomberg 03/11/25
Disclosures: Indexes are unmanaged and cannot be invested in directly.
Past performance is no guarantee of future results.
Volatility Is Like A Toll Investors Pay On The Road To Attractive Long-Term Returns
One of our favorite charts illustrates this point very well. Since the 1980s, the S&P 500 has experienced a maximum intra-year drawdown of 13.9%, on average, while the index has produced an average gain of 13%. Though this latest pullback felt significant, history at this point tells us it hasn’t been anything out of the ordinary. In fact, the large cap index is still five points short of its average annual decline. Even in up years, the average maximum drawdown is nearly 11%, so we are not even there yet. Simply put, volatility is like a toll investors pay along the road to achieving attractive long-term returns.
Volatility is a Cost to Achieve Attractive Long-Term Stock Returns
S&P 500 max pullback per calendar year
Source: LPL Research, Bloomberg 03/11/25
Disclosures: Indexes are unmanaged and cannot be invested in directly.
Past performance is no guarantee of future results.
Patient Investors Are Very Likely to Be Rewarded
Another way to look at the advantage long-term investors possess is to look at the historical probabilities that stocks advance over various time horizons. The odds are compelling, very much in investors’ favor for holding periods beyond one year. In fact, for all rolling one-year periods back to 1980 using monthly data, the S&P 500 Index was higher in 74% of them. Go out to three years — still a very reasonable holding period for the overwhelming majority of investors — and those odds rise to 85%. For those who are younger and can commit to 10 years or longer, the odds go even higher from there. The key takeaway here is investors have an advantage over short-term traders and asset managers benchmarked every quarter. The odds are stacked in favor of long-term investors who are able to ride through the ups and downs and stay invested.
Risk-Reward Trade-Off Is Attractive For Patient Investors
Percentage of time S&P 500 rose over various time periods
Source: LPL Research, Bloomberg 03/11/25
Disclosures: Indexes are unmanaged and cannot be invested in directly.
Past performance is no guarantee of future results.
Market Timing is Extremely Difficult
You have probably heard this message before. It’s very difficult to beat the market with “market timing,” or shifting in and out to try to avoid losses and still participate in the upside. A recent study done by Dalbar suggested that the penalty investors pay for trying to time the market may be as much as 5%. In other words, hypothetically, if a diversified portfolio bought and held returned 8% annualized over time, then a typical investor might expect to achieve around 3%. Every investor has a different experience, but in aggregate, this seems like a reasonable estimate of the overall penalty for market timing (this is also a reminder to keep fees for active managers as low as possible).
Another way to illustrate this point is to compare performance for a hypothetical long-term investor in the S&P 500 Index to one who misses the best day(s) of a year. Of course, precise index returns cannot be achieved, but index funds can get close. Missing just the one best day of a year takes annual gains down from 9.8% to 6.1% during the 35-year period analyzed (excluding dividends). Take out the two best days and the annualized gain drops to just 3%, which you can get in bonds.
The Cost of Market Timing: Potentially Missing the Best Days
S&P 500 Index annualized performance (1990–2024)
Source: LPL Research, Bloomberg 03/11/25
Disclosures: Indexes are unmanaged and cannot be invested in directly.
Past performance is no guarantee of future results.
Staying invested is especially important during volatile periods below the 200-day moving average, which is when most of those big up days tend to come. Some of the biggest up days in recent history came during the Great Financial Crisis in 2008 and 2009 and the pandemic in 2020, when investor pessimism was at its highest.
Conclusion
Market volatility can be unsettling, especially after two years of stocks marching steadily higher. In a way, enduring the ups and downs is a price of admission to achieve attractive returns the stock market offers over time. Volatility is normal. The hard part is understanding that in the moment and controlling emotions.
LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains its tactical neutral stance on equities, while actively monitoring progress toward establishing a durable market low. More clarity on tariffs and trade policy, reductions in consensus economic growth and profit expectations, and more technical evidence that sellers have largely washed out are among the necessary ingredients. We don’t think we’re quite there yet, but in terms of levels on the S&P 500, we may be close.
For now, we suggest an element of caution. We will continue to monitor tariff news, economic data, earnings estimates, and various technical indicators to try to identify an attractive entry point to go overweight equities. The risk-reward trade-off has clearly improved, but under a cloud of trade uncertainty, a big move to the upside in the short-term looks unlikely.
LPL Research also suggests exposure to diversifying alternative strategies for both tactical and strategic asset allocations. Products indexed to alternative strategies benchmarks have proven to be a useful tool in mitigating equity market declines this year.
Important Disclosures
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.
Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.
Asset Class Disclosures –
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
Bonds are subject to market and interest rate risk if sold prior to maturity.
Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.
Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.
Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.
High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
Precious metal investing involves greater fluctuation and potential for losses.
The fast price swings of commodities will result in significant volatility in an investor's holdings.
This research material has been prepared by LPL Financial LLC.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value
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Jeff Buchbinder
Jeff Buchbinder, CFA, provides the top-down view of the stock market for LPL Financial Research. He has over 25 years of experience in equities.
