One of our guiding principles is investor behavior is the dominant determinant of investor outcomes. An extreme example to illustrate the point – consider two investors with identical portfolios. Both find their portfolios in a 57% drawdown. Investor A sells. Investor B waits. The assets in Investor B’s portfolio go on to return +1,310%. Here are the real outcomes for these two investors from the moment before the drawdown to present:
Investor A: -57%
Investor B: +529%
That is a, umm, a pretty stark difference. The power of behavior. Perhaps you intuited from the suspiciously specific numbers used in the prior example this was a real historical scenario. Illustrated were the outcomes of two investors in the S&P 500 from the market top preceding the Great Financial Crisis drawdown in October 2007 to the present. Investor A sold in March of 2009 while Investor B did not. That singular decision was the difference between the two results above.
The tricky part of behaving well during market volatility is that every past downturn looks like an opportunity while every future downturn looks like a risk.* Using current events to stoke fear among long-term investors is a big business – the entire media complex, including social media, is oriented to drive content that instills fear of the future rather than faith in the future. If you don’t believe me, navigate to your favorite news network’s webpage (I don’t care whether it’s Fox or MSNBC, either will do) or open your X feed. Local news reports on softball games; national news reports on genocides.** And all anyone pays attention to anymore is national news.
Fear is a pre-requisite to one of the big behavioral mistakes that leads to the long-term investor’s ruin. Here is a sampling of reasons some investors were worried in 2025. It is impossible to review this list now free from hindsight bias. We know how it all turned out. The S&P 500 closed the year +17.88% on a total return basis. Many of these fears now seem quaint. I assure you they did not feel that way at the time:
- A firm no one had heard of in China called DeepSeek released its own large language model in January. Rumors were it was able to train its model at a cost of $6,000,000 compared to hundreds of millions US firms were spending on their models. Nvidia’s stock price declined 17% in one day.
- AAII bearish sentiment reached the seventh highest level ever recorded in February.
- Atlanta Fed GDPNow estimate for Q1 GDP comes in at -2.8%.
- S&P 500 endures its 5th fastest correction (down 10% from a previous high) ever in a mere 20-day span in late February/early March.
- Trump announces sweeping reciprocal tariffs on “Liberation Day” on April 2. The S&P 500 declines 10.5% over the next two days – the 5th largest two day decline.
- The VIX – a popular measure of market volatility and a proxy for fear in the market – closes three standard deviations above its long run average. The only other times this occurred were the Great Financial Crisis in ’08 – ’09 and the COVID crash in March 2020.
- The End of US Exceptionalism becomes a driving narrative in response to Trump’s tariffs. Everyone is suddenly certain there will be extreme capital flight from the US and the dollar’s reserve status is in jeopardy.
- The S&P 500 touches bear market territory (down 20% from a recent high) on an intraday basis on April 8th.
- Fitch downgrades US credit to Aa1. The US is no longer AAA rated by any of the three major credit ratings agencies.
- June 21, 2025 Operation Midnight Hammer commences. US bombers take off from Missouri and bomb Iran’s nuclear enrichment facilities at Fordow before returning to Missouri after 37 hours of continuous flight. Fears of war and an oil shock following a possible closure of the Strait of Hormuz.
- In October, Jamie Dimon warns “when you see one cockroach there are probably more” in response to the First Brands bankruptcy filing. Everyone is skittish about bad loans in the burgeoning private credit space.
- October – November the US government endures its longest shutdown on record. Key economic reports are cancelled.
I should also mention an ongoing narrative since 2023 has been the markets have been propped up by only seven stocks - the Magnificent Seven (Nvidia, Apple, Microsoft, Alphabet, Amazon, Meta, and Tesla). In 2025, five of the Magnificent Seven stocks underperformed the S&P 500, yet the index still returned nearly +18% on a total return basis.
2025 was another year where we had a drawdown during the year exceeding 10% but ended the year with double digit returns. Here are a few other years that occurred:
2023, 2020, 2016, 2012, 2010, 2009, 2003…
You get the idea. It happens pretty frequently.
There is always a reason for the drawdown. The fear is real. It is not irrational in the moment. The extrapolation of the fear into a problem the economic horsepower of the United States is unable to solve is the mistake.
Sean Cawley, CFP®
Sources:
YCharts
https://www.tker.co/p/wall-street-2022-stock-market-outlook
JPM Morgan Guide to Markets Q1 2026
*Morgan Housel first said this.
**Morgan Housel again. You really ought to read his books.
This hypothetical example is for illustrative and educational purposes only and does not represent the performance of any actual investor or client account. The S&P 500 Index is an unmanaged index and cannot be invested in directly. Index performance does not reflect fees, expenses, or taxes. The example assumes specific investor behavior and timing decisions, which may not reflect actual investor experience. Past performance is not indicative of future results, and there is no guarantee that any strategy or approach will achieve similar outcomes. This content is not investment advice or a recommendation to buy or sell any security. Neither asset allocation nor diversification guarantee against investment loss. All investments and investment strategies involve risk, including loss of principal.
Neither asset allocation nor diversification guarantee against investment loss. All investments and investment strategies involve risk, including loss of principal.
Content here is for illustrative and educational purposes only. It is not legal, tax, or individualized financial advice; nor is it a recommendation to buy, sell, or hold any specific security, or engage in any specific trading strategy. Results will vary. Past performance is no indication of future results or success. Market conditions change continuously.
This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.