Don’t Let Downturns Bust Your Portfolio Bracket​

As March Madness captivates sports fans with its thrilling upsets and bracket-busting surprises, we can’t help but see parallels to the investment world. Just as college basketball fans must ride out the uncertainty of tournament play, investors face their own versions of “market madness” throughout the year.

When markets become turbulent, even experienced investors can feel uneasy watching their portfolio values fluctuate. Larger portfolios often mean larger dollar swings during market drawdowns, which can be tough to bear. Yet building and preserving wealth requires maintaining perspective and discipline, especially during uncertain times. That’s why it’s important to work with your advisor on a game plan that won’t let market declines “bust your bracket.”

Understanding Market Corrections: Downturns Are Normal

In mid-March, the S&P 500 index (a benchmark for large U.S. company stocks) fell into correction territory when it declined 10% from its prior high. But corrections—periods when investments drop in value temporarily by 10% or more—are not unusual events. They’re regular features of healthy markets. As you can see in the chart below, the data tells a compelling story: Despite experiencing average drops of 14% during a given calendar year, the S&P 500 has delivered positive annual returns in 34 of the past 45 years.

This pattern is striking. Even in years with positive returns, investors regularly endured significant declines along the way. In 2009, for example, the market dropped 28% at one point before finishing with a 23% gain. In 2020, a dramatic 34% decline during the pandemic still resulted in a 16% gain by year’s end.

Having this historical perspective helps transform alarming headlines into isolated episodes within a broader wealth-building journey.

Spreading Your Investments: The Power of Diversification

We believe a well-balanced portfolio of stocks and bonds remains the cornerstone of successfully investing through market volatility. That’s why we craft personalized portfolios attuned to your risk comfort and long-term goals. We base our approach on the following principles:

• Stock diversification: Maintaining exposure to companies of different sizes (large, mid and small-cap), across various industries, and based in different countries, helps manage portfolio risk while creating the opportunity to participate in gains. When U.S. companies struggle, for instance, international stocks might advance—which we’re seeing in the markets right now. This geographic and sector diversification helps smooth your overall returns during market turbulence. 
• Bond diversification: With cash yields likely moving lower, finding the right mix within your bond allocation is increasingly important. This means balancing these risk factors: 

• • Maturity risk: Shorter-term bonds typically offer more stability but lower yields, while longer-term bonds provide higher yields but greater price fluctuations when interest rates change.
  • Interest-rate risk: Bonds with different durations (a measure of sensitivity to interest-rate changes) respond differently to Federal Reserve policy shifts.
  • Credit risk: Higher-quality government and corporate bonds provide stability, while carefully selected lower-rated bonds can enhance returns when economic conditions are favorable.

True diversification means portions of your portfolio will occasionally move in different directions—when one area underperforms, another may outperform. This isn’t a flaw but rather evidence that your strategy is working exactly as designed to help you weather market volatility.

Rebalancing: Turning Market Swings Into Opportunities

Periodically rebalancing your portfolio (resetting investment percentages back to your original targets) serves multiple purposes:

• Managing risk: Prevents your portfolio from becoming too heavily concentrated in any single investment
• Creating good habits: Establishes a systematic approach for buying low and selling high
• Tax benefits: Creates opportunities for tax-loss harvesting (selling investments at a loss to offset gains) and managing capital gains

We monitor your portfolio’s allocations throughout the year and periodically rebalance on your behalf. We believe this transforms market volatility from a concern into a potential advantage. (Click here for more on the benefits of rebalancing.)

Stay Invested: Timing the Market Rarely Works

Even sophisticated investors can be tempted to move in and out of markets based on momentum or emotion. However, research consistently shows how difficult this is to do successfully. Missing just the five best market days between 1980 and 2023 would have significantly reduced a portfolio’s long-term performance.

The most successful wealth strategies keep you invested in the market through full cycles rather than attempt to avoid declines. This is particularly important since many of the market’s strongest days occur during periods of increased downside volatility.

Strategic Opportunities During Market Downturns

Market volatility creates several strategic opportunities:

• Tax-loss harvesting: Selling investments at a loss to offset taxable gains while maintaining market exposure through similar but not identical investments
• Roth conversions: Moving traditional retirement assets to Roth accounts during market downturns to pay less in taxes on the conversion
• Estate planning: Gifting investments that have temporarily dropped in value to maximize the impact of your lifetime gift allowances
• Reducing concentrated positions: Using market volatility as an opportunity to diversify away from large positions in a single investment through carefully planned selling strategies.

Your Mindset: Your Greatest Advantage

Often, the biggest threat to long-term performance isn’t market volatility itself but our reactions to that volatility. Here’s how you can stay on track:

• Written investment guidelines: Create a document outlining your investment approach, comfort with risk and long-term asset allocation strategy.
• Cash reserves: Ensure you have adequate cash on hand to prevent forced selling during market downturns.
• Asset location: Place higher-risk investments in long-term structures (such as irrevocable trusts, retirement accounts, etc.) and be conservative in accounts that you use for lifestyle expenses and short- and intermediate-term savings. This approach can help you ride out volatility because you’ll have the liquidity and safety you need in the accounts you’ll draw from first, while your risk will be located in accounts that you are unlikely to access for 10-plus years.

The Long-Term Perspective

When viewed over decades, even significant market events—from the 1987 crash to the 2008 financial crisis to the pandemic sell-off—appear as temporary interruptions in a larger wealth-building journey. The data is clear: Markets have historically rewarded patient, disciplined investors.

Maintaining this perspective—especially when headlines suggest otherwise—is often what separates those who simply preserve wealth from those who grow it over time.

Much like a well-constructed March Madness bracket requires looking beyond individual biases to pick the teams that will go the distance, successful investing means not letting short-term market volatility derail your long-term strategy. By understanding market patterns, diversifying wisely, rebalancing regularly and maintaining discipline, you can confidently navigate the madness of the markets without letting temporary declines bust your long-term financial bracket.