MW Over 50 and terrified about tariffs and your 401(k)? A lesson from history.

By Brett Arends

It's stomach-churning to see a market slump when you're nearing retirement and each move makes a bigger difference

If you're panicking about your 401(k) plan following Donald Trump's so-called liberation day package of massive tariffs and the stock-market selloff that followed, you may not have a stock-market problem.

You may have an allocation problem.

And that's especially true if you're over 50 and thinking about retiring in the next 10 or 20 years.

Too many U.S. investors have been told to pin their hopes on U.S. large-company stocks for their investment returns - even as those large-company stocks became increasingly overvalued, overhyped and therefore risky.

And they've neglected other, diversified - and probably better-valued - assets, including international large-company stocks, international small-company stocks, "value" stocks, inflation-protected U.S. Treasury bonds, and even foreign currencies.

This has been especially damaging for older investors.

It's one thing to watch a stock-market slump when you're young, you're early in your investment career, and you won't need the money for decades.

It's another to watch it when you've already got a lot of chips on the table, so each swing makes a bigger difference, and you're going to need the money soon-ish.

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The good news for investors is that Thursday's "postliberation" slump on the stock market has been remarkably muted - so far, anyway. The S&P 500 SPX index of large U.S. stocks was down less than 4%. The Nasdaq Composite COMP index of technology stocks was down by around 5%. Both indexes have fallen back just to where they were last September.

The bad news?

In the bear markets of 2000-03 and in 2007-09, the S&P 500 fell by a half. After the dot-com bubble burst, almost exactly 25 years ago, the Nasdaq Composite fell by 80%.

Booyah! Buy the dip!

I remember that well. I used to get daily calls from individual investors who were "dollar-cost averaging" their favored tech stocks, all the way down to zero. Then the calls stopped.

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It's ironic that this mania for large U.S. "growth" stocks has come almost exactly a quarter-century after the last one. In 1999-2000, as recently, you were told you couldn't go wrong betting on big U.S. growth and technology stocks. Otherwise intelligent people, many in middle age or older, kept their entire portfolios in individual stocks like Cisco Systems $(CSCO)$. The Nasdaq Composite giants were bound to do well in the years ahead because they had done so well in the years just past, went the argument.

Call it a spectacular case of circular reasoning, or double counting. Or just a mania.

Recent market behavior hasn't been obviously saner, either.

The supposedly diversified S&P 500 index allocates about a third of your money to just seven companies: the so-called Magnificent Seven of Alphabet $(GOOGL)$ $(GOOG)$, Amazon $(AMZN)$, Apple $(AAPL)$, Meta $(META)$, Microsoft $(MSFT)$, Nvidia $(NVDA)$ and Tesla $(TSLA)$.

Even if you accept that Big Tech stocks will end up producing good long-term returns, those returns may not come for a long time. This is of little use to most ordinary investors, who simply don't and won't ride out lost decades. It's of even less use to older investors, who couldn't even if they wanted to.

The cult of big U.S. growth and technology stocks has led to the inevitable problems, as people stampeded into these stocks at the peak a couple of months ago, and are now thinking about stampeding back out again with prices back down.

Buy high, sell low - what could go wrong?

Contrary to conventional wisdom, the brutal bear market that followed the bursting of the first dot-com bubble 25 years ago was not a disaster for all investors. It was only a disaster for those who had bought into the hype, overloaded their portfolios with tech stocks and failed to diversify.

Consider.

Using Portfolio Visualizer, I tracked how various types of investments performed over the five years that followed the peak of the stock-market bubble in March 2000.

Those large U.S. growth stocks? Ugh. Overall, you lost a third of your money over that period. (As a newspaper reporter at the time, I remember the irony of repeatedly referring to "growth" stocks in print while reporting on their latest plunge.)

But over the same period, investors made about a 25% gain on so-called U.S. value stocks - meaning the cheap stocks in the kind of boring but profitable companies that had made investors spit during the dot-com mania. (The most obvious example at the time was Warren Buffett's Berkshire Hathaway (BRK. A) $(BRK.B)$, which tanked during the mania and boomed almost immediately afterwards.)

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From 2000 to 2005, you also did fine, or better, if you had money in small U.S. stocks, small international stocks, emerging markets, real-estate investment trusts, corporate bonds, U.S. Treasury bonds, inflation-protected U.S. Treasury bonds $(TIPS.UK)$, global bonds and precious metals such as gold. These investments fell far less than large U.S. growth stocks during the slumps, and recovered faster and better in the recoveries.

U.S. REITs and international small-company stocks made you gains of about 140%. Small U.S. value stocks made you a 90% total return. Large international value stocks ended up earning you nearly 60%, and international bonds listed in foreign currencies - with no hedging back to the U.S. dollar - made a remarkable 65%.

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Those global bonds ended up beating the U.S. bond-market index by an average of 4 percentage points a year.

Someone who invested in large U.S. growth stocks at the peak in early 2000 had to wait 12 years - no, really - to even get their money back. If you adjust for inflation, they weren't in profit until 2014.

The good news, so far, is that the selloff has been pretty minor by long-term standards. Of course, 4% or 5% is a huge move in the stock market for a day, but trivial over five or 10 years. That means there is still plenty of time left to make sure your allocation matches your own circumstances, as well as the realities of the market.

-Brett Arends

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April 04, 2025 06:00 ET (10:00 GMT)

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