Invest in the Long Term

Additional content provided by Colby Hesson, Analyst, Research.

This latest bout of market volatility has been unsettling, especially after such a strong multi-year run for stocks. At times like these, historical perspective can be helpful. 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.