March 2025: Market Sentiment & The Necessity Of Finding Your Balance

March 2, 2025

John Browning, MBA and CSA? | CEO, Principal

Even seasoned investors fall prey to the siren song of recent market trends and prevailing sentiment.? This 'recency bias' can lead to knee-jerk reactions that erode long-term returns.? It can be easy for me to dismiss this feeling after decades of participating in the market and having confidence in the strategies I learned to position portfolios for profit. Like the pilot who knows there will be market turbulence and understands when it is a problem and when it is part of the flying process, it needs to understand that their passengers may be a bit unnerved when it happens. Experienced pilots sometimes need to explain what turbulence is, why it happens, and what the plane and pilot do to adjust.? This can help calm nerves and put things in perspective.??

Recent market swings have highlighted a gap between how investors feel and how markets have performed. As the famous Warren Buffett quote suggests, "be fearful when others are greedy and greedy when others are fearful.” While this can seem counterintuitive when there are many economic and political concerns weighing on the market, which causes uncertainty, which weighs on the market.?? Traditional wisdom and history generally tell us that staying invested rewards those with a long-term investment horizon.?? However, "traditional wisdom" can sometimes lead you astray, and what if you are in or nearing retirement???

Uncertainty regarding the current political leadership, tariffs, taxes, layoffs, and more are causing market sentiment to decline.? This is very normal.?? During a typical year, the stock market will contract by 10% a few times during that year, and often ends the year strongly higher.?? During August of 2024, one of the strongest years on record, the market contracted 8% by some measures.? Pilots will tell you that an important part of their training is trusting their instruments because sometimes your senses can deceive you, leading to catastrophic results.?

The key to managing volatility isn't reacting to the market's ups and downs but rather maintaining a well-constructed portfolio that aligns with your long-term goals and risk tolerance. Risk tolerance is important and it must be balanced with your true needs in the future.?

For example, if you anticipate needing one million dollars for retirement in ten years but currently have only $250,000 saved and can only contribute $25,000 annually, you'll need to make a critical decision. You must weigh what matters most: maintaining a low risk tolerance or ensuring you have enough funds to retire comfortably in ten years. Relying solely on short-term treasury bonds is unlikely to help you reach your goal.

How can investors maintain perspective on recent market moves and news headlines?

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Mastering Market Sentiment: Your Path to Financial Security:?

According to the latest AAII Investor Sentiment Survey, which measures how investors feel about the market, bearish attitudes have recently outpaced bullish ones by as much as 19%. This is the most pessimistic investors have felt since late 2023, when some expected the economy to fall into recession. The accompanying chart clearly shows that these feelings can change quickly.

There is often a gap between how investors perceive markets and how they perform. Despite day-to-day market swings and worsening sentiment, major stock market indices have experienced positive returns over the past several months. This underscores the fact that investor sentiment is often a contrarian indicator. As Warren Buffett’s quote suggests, the greatest market opportunities tend to present themselves when investors are the most worried.

How do you find the right balance for you and deal with the emotions that pull at your mind???

One way is through dollar cost averaging during both rising and falling markets.? There is an enhanced version of this strategy, but it tends only to work well when implemented within strict rules, and you should consult a wealth manager or investment advisor before attempting it.?? Another way is to ensure your portfolio produces enough income to meet your daily needs and stay invested through the market volatility no matter what. While this has worked well historically, a better strategy may be to create income over and above your daily needs and dollar cost average into the market with the difference.??

Another real problem investors face today is that when you invest in many investment products like the index or mutual funds, you take on the emotional responses of everyone invested in that product, thus losing some control over what happens.?? This is why most mutual fund managers cannot outperform the market.?? They function at the mercy of the investors in the fund, liquidating emotionally at low prices and buying emotionally at higher prices.? You can take back that control with the help of a qualified wealth manager with a disciplined approach.

Proper portfolio construction balances risk and reward:

Headlines and investor sentiment should be taken with the right historical perspective. You should be comfortable in knowing our wealth management strategies are built to weather changing market conditions and are aligned with our long—and short-term goals, even if we may not feel fully comfortable with recent market moves.

Yes, tariffs can cause inflation in the short and intermediate term.? Yes, geopolitical events and trade policies matter, and yes, the market and economy are complex adaptive systems requiring significant experience, discernment, and analysis to navigate.? If it is not something you have done every day for thirty years, it can be unnerving.? I am confident, after more than three decades of moving through all sorts of political and economic environments, that there is always a way to position yourself to protect and grow your wealth.??

I am just as confident when facing conflicting market signals and investor pessimism, the solution is not to try to time the market, exit the market altogether, or make any sudden extreme changes in strategy. Instead, these factors are a reminder of the importance of quality portfolio construction. The accompanying chart shows that risk and reward are two sides of the same coin and in my opinion need to be managed together. If higher valuations suggest an asset class, sector or particular company will face greater risks, then it may be appropriate to tilt toward other investments without exiting the space altogether.? By that same token, if nothing has fundamentally changed about a particular company; it is still showing sales and margin growth, the balance sheet remains strong, the company is innovative, and no major management changes are in sight. It may be appropriate to purchase shares at the now lower price.??

When done right, balance is found, wealth is protected, and growth continues through various market and economic scenarios. Historically, market pullbacks can present opportunities to rebalance and add high-quality investments at better prices. Maintaining this discipline and developing an appropriate plan is why working with a trusted advisor or wealth manager is important when developing your strategies.

Why Discipline Trumps Market Fears:

For these reasons, there is perhaps nothing more important for long-term investors than simply sticking to the plan. The accompanying chart shows that, over the past 25 years, holding on after pullbacks was superior to getting out of the market, even for brief periods. History does not guarantee future results; however, it has consistently shown that staying invested through market cycles is a good way to build wealth over years and decades. Regardless of the causes of short-term market uncertainty, trying to time the market is difficult and often backfires. The fact that investor sentiment can shift so quickly is why those who can stay disciplined are typically rewarded.

The bottom line? It’s natural to be concerned about recent market swings and negative headlines. However, history shows that long-term investors who hold properly constructed portfolios and stay disciplined are best positioned to achieve their financial goals.

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