Hello, YieldAlley readers! In this issue:

🚗 Waymo Robotaxis Make Up 20% of Uber Rides in Austin (Bloomberg)

🏝️ Would $2M at 23 Make You “Set for Life”? (Of Dollars and Data)

🧑‍💻 The Gen X Career Meltdown (New York Times)

🧐 Four Questions Retirees Should Ask Themselves About Their Investment Allocations (WSJ)

🤖 The AI Boom vs. the Dot-Com Bubble: Have We Seen This Movie Before? (Research Affiliates)

In the wake of President Trump's recent tariff announcements, an online investment forum erupted with panicked posts. "I've lost 15% in three days!" one investor lamented. Another wrote, "I'm selling everything and moving to cash until this blows over." A third claimed, "This is different from previous downturns—tariffs change everything."

Such reactions are understandable but potentially devastating to long-term financial health. Let me share a cautionary tale about how reactive investing during turbulent times can derail even the most promising retirement plans.

Meet Michael and Jennifer, two investors with similar portfolios who responded very differently to the recent market turbulence.

When the Trump administration announced sweeping tariffs that sent markets plunging in what analysts called "one of the worst three-day periods for equity markets in history," Michael couldn't bear to watch his life savings evaporate. After seeing his portfolio drop by more than 10%, he sold everything and moved to cash, vowing to return when "things stabilized."

Jennifer felt the same anxiety but remembered past market disruptions. Instead of selling, she reviewed her asset allocation, confirmed it still matched her long-term timeline, and then deliberately avoided checking her portfolio for several days.

The day after Michael sold, markets experienced "one of the top 10 strongest days for global stock markets in history". A massive rally followed the announcement of a 90-day pause on some tariffs. This dramatic reversal saw markets "going from selling off in the morning to rallying double-digit percentages by the afternoon."

Michael, still shell-shocked from his losses, remained in cash, uncertain when to re-enter. Jennifer’s portfolio, meanwhile, recovered much of its value in that single day.

This scenario illustrates a crucial investment truth: Over the last 25 years in the S&P 500, the five best days were responsible for about 36% of the total return generated over 25 years. In other words, if you miss days like the recent rally, you’re really doing a disservice to your investments.

Michael’s mistake wasn’t just emotional. By missing the recovery day, he locked in his losses and missed a critical component of long-term returns. As markets continued to oscillate through tariff implementations and negotiations, Michael remained paralyzed by indecision, watching from the sidelines as Jennifer’s portfolio gradually recovered.

According to the Morningstar “pain index,” the most painful stock market periods combine both steep declines and long recovery times. The four most painful periods in history included the Great Depression (79% decline, 21.2-year recovery), the “messy 1970s” (52% decline, 14.6-year recovery), World War I and influenza (51% decline, 13.5-year recovery), and the “lost decade” from 2000-2013 (54% decline, 12.8-year recovery).

Yet, despite spending approximately 73.5% of their time in bear markets over the past 95+ years, markets have always eventually recovered and moved higher. This historical resilience provides crucial perspective when navigating today’s tariff-induced volatility.

For those with a 10-15+ year investment horizon, consider these principles:

Remember our series on lazy portfolios, such as Harry Browne’s Permanent Portfolio with an unchanging allocation. While cash might look tempting during market volatility, it's important to resist the urge to shift entirely out of stocks. Such a move might provide short-term relief but creates another nagging worry: determining when to get back in. A cash-only approach may protect against further equity losses but doesn’t safeguard against inflation risk or the chance that you’ll outlive your money because your portfolio didn’t grow enough.

During highly volatile times, if you strongly believe a recession is near, consider moving some cash, money market funds, and T-bills into longer-dated bonds to lock in current rates before they potentially drop. This is particularly relevant because the classic response to a recession is to lower interest rates to encourage economic growth, meaning the yield currently available on T-bills, money market funds, and cash will likely decrease. But remember rule number 1: Do not take drastic measures and maintain an appropriate asset allocation.

Tariffs are raising concerns about a potential recession while simultaneously increasing inflation risks. This creates a particularly challenging environment, making inflation-protected assets like TIPS and I-Bonds essential components of portfolios during tariff-driven economic uncertainty.

One of the few benefits of market downdrafts is the opportunity to improve your tax position. We talked about this last week, but if you have taxable accounts, you may be able to sell securities at a loss and apply those losses to offset capital gains elsewhere in your portfolio or up to $3,000 in income. Converting traditional IRAs to Roth IRAs is also worth considering in times of market turmoil, as depressed IRA balances mean that you can convert more of your account with the same tax impact as when stocks were riding high.

As Dominic Pappalardo of Morningstar Investment Management noted, “Fundamentals haven’t changed by any meaningful amount” in just a few days. “It doesn’t happen that quickly. Price volatility has been off the charts. In other words, the prices in the market are adjusting much faster than the underlying fundamentals are, and no investor could ever get the timing right on those wild swings we’ve seen."

For those with 10-15+ year investment horizons, today’s tariff-induced volatility will likely be a footnote in your financial journey. Stay the course, maintain appropriate asset allocation, and remember that market disruptions have always been temporary, while hasty reactions to them can permanently damage your retirement security.

Government Money Market Funds (7-Day Yields)

Brokered CD Rates (6-Month Rate)

ETFs (30-Day Yields)

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