Navigating Market Volatility: A Long-Term Perspective
Most of the conversations I have with clients during a market drawdown are really about one thing: whether the plan they wrote in calmer times still works, and whether they can trust it when their brain is telling them otherwise. The market itself barely comes up. They want someone to walk through what they own, why they own it, and what (if anything) needs to change. The honest answer is usually: very little needs to change, and here's why.
As a CERTIFIED FINANCIAL PLANNER® (CFP®) professional running a fee-only fiduciary firm in Nashville, the work I do during volatility is mostly that. Not predicting the bottom. Not repositioning portfolios reactively. Coordinating behavioral, tactical, and tax decisions so the plan that was right in calm markets keeps being right in stressed ones.
This is the longer version of a piece I wrote on Melby Money for our broader readership, How to Invest During a Market Downturn. What follows is the same set of ideas applied to a household with a substantive portfolio, tax complexity, and a financial plan worth protecting.
The behavioral cost is real and quantifiable
The single largest source of underperformance for individual investors is the gap between investment returns and investor returns. Investments return what the markets return. Investors return what's left after their decisions to buy, sell, contribute, and withdraw. Decades of Morningstar analysis show that this gap typically runs around 1.5 percentage points annually for the average mutual fund investor. [1]
The gap doesn't come from bad fund picks. It comes from when investors get in and out. The average dollar in a fund earns less than the average share of the fund because dollars tend to arrive after good performance and leave after bad performance.
A 1.5 percentage point gap doesn't sound like much. Over 30 years on a $1 million portfolio at 7 percent versus 5.5 percent (using the Fisher equation to express both as roughly 5 percent versus 3.5 percent real, assuming 2 percent inflation), the difference is over $1.4 million in ending wealth. The behavioral gap is the single largest variable in long-term planning outcomes, larger than asset allocation or fund selection.
The role of an advisor during volatility is partly tactical and partly behavioral coaching. The behavioral piece is harder to quantify and arguably more valuable.
Historical context for the conversation
The S&P 500 has experienced 27 bear markets since 1928, with an average decline of approximately 35 percent and an average duration of about 9.6 months. [2] Every single one resolved in a recovery to new highs. The COVID drawdown in 2020 recovered in four months. The 2022 bear took about 18 months. The 2008 financial crisis took roughly four years.
A 50-year investment horizon includes, on average, about 14 bear markets. The relevant planning question is never "will we experience a 30 percent drawdown?" The answer is almost always yes, multiple times. The relevant question is "what's the plan when we do?"
What we actually do during drawdowns
For clients in the accumulation phase, the playbook during a meaningful equity drawdown typically includes some combination of the following.
Continue automated contributions without modification. The most common destructive impulse during a drawdown is to pause 401(k) contributions, redirect cash to "safer" investments, or hold contributions in cash until markets stabilize. Each of these decisions converts a temporary paper loss into a permanent opportunity cost. J.P. Morgan's analysis of S&P 500 returns from 2004 to 2024 found that investors who stayed fully invested earned 10.5 percent annualized, while those who missed just the 10 best trading days dropped to 6.2 percent. [3] Seven of those 10 best days occurred within 15 days of a worst day. The recovery is invisible until it's well underway.
Tax-loss harvesting in taxable accounts. For households with substantial taxable brokerage balances, a drawdown is a tax planning opportunity. Selling losing lots to recognize capital losses, then replacing them with similar (not substantially identical, per IRS wash-sale rules) holdings preserves market exposure while banking losses that can offset capital gains and up to $3,000 of ordinary income annually, with unused losses carried forward indefinitely. Over a multi-decade investing horizon, disciplined tax-loss harvesting can add meaningful basis points of after-tax return.
Roth conversion windows. Clients with significant traditional IRA balances often find drawdowns the most favorable moment to execute partial Roth conversions. The same number of shares moves from traditional to Roth at a lower current dollar value, which means a lower tax bill now and the subsequent recovery occurs inside the tax-free Roth wrapper. The decision is bracket-dependent and requires modeling alongside other income and Medicare IRMAA considerations, but the math frequently favors conversion activity during a meaningful equity drawdown.
Disciplined rebalancing. Asset allocations drift during volatile markets. A portfolio targeted at 70 percent equities and 30 percent fixed income may drift to 60/40 after a 30 percent equity decline. Rebalancing back to the target involves buying equities at lower prices and trimming fixed income at full price. The discipline runs against the emotional grain of the moment, which is precisely why systematic rebalancing exists and why it tends to produce a return premium over the long run.
Reassessment of the financial plan, not the portfolio. Drawdowns are a useful prompt to confirm that the plan still works under stress. We model whether projected retirement spending is still funded, whether cash reserves are adequate, and whether any near-term distributions (college tuition, home purchase, etc.) need to be re-sourced from the bond or cash allocation rather than equities. Most of the time, the plan still works. The exercise reduces anxiety because it replaces vague fear with concrete numbers.
What we don't do
We don't move to cash. We don't try to time the bottom. We don't repaper the asset allocation to "feel safer." We don't adjust the plan based on what financial media is currently predicting. We don't sell long-term holdings to chase a different theme. We don't suspend the systematic processes (contributions, rebalancing, harvesting) that were designed for exactly these conditions.
The hardest part of professional portfolio management during volatility is doing less than the client expects. Most of the work is already built into the plan. The job during the drawdown is to execute the plan that already exists.
A note on the current environment
As of mid-2026, U.S. equity markets are trading near record highs, with the S&P 500 above 7,400 and a forward 12-month price-to-earnings ratio of roughly 20.9, above both the 5-year average of 19.9 and the 10-year average of 18.9. [4] Market concentration in a handful of mega-cap technology names has reached historically elevated levels, which has structural implications for portfolio risk that broad-market index investors may not fully appreciate. We don't know when the next meaningful drawdown will arrive. We do know that a 35 percent decline is the historical average and that the conditions that typically precede such moves are present in the current data.
The right preparation is to confirm the portfolio, plan, and emergency reserves can absorb a drawdown without forcing any decisions. That's the whole job. Preemptively cutting equity exposure tends to cost more in lost growth than it saves in avoided volatility, so we leave the allocation where the plan put it. We're doing that work with clients now, before it matters.
Discuss your investment strategy
Most of the people who schedule a conversation with us at Melby Wealth Management have never worked with a financial advisor before. That's exactly who we work with. If you're approaching a market environment that increasingly looks like late-cycle and you want a sober second opinion on how your portfolio is positioned, schedule a meeting. The conversation is more useful before the drawdown than after.
References
[1] Morningstar. "Mind the Gap: A Report on Investor Returns." Annual research series. https://www.morningstar.com/lp/mind-the-gap
[2] Hartford Funds (via Ned Davis Research). "10 Things You Should Know About Bear Markets." https://www.hartfordfunds.com/practice-management/client-conversations/managing-volatility/bear-markets.html
[3] J.P. Morgan Asset Management. "Back to School: 3 Principles for Your Portfolio." Analysis based on S&P 500 Total Return Index, July 2004 through July 2024. https://www.jpmorgan.com/insights/markets/top-market-takeaways/tmt-back-to-school-3-principles-for-your-portfolio
[4] Crestwood Advisors. "May 2026 Economic and Market Update: New Highs and Old Risks." https://www.crestwoodadvisors.com/may-2026-economic-and-market-update/
About The Author
Shaun Melby, CFP® provides fee-only financial planning and investment management services in Nashville, TN through his company Melby Wealth Management.
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