For investors concentrated in U.S. equities, the early years of President Donald Trump’s second term have been marked by elevated volatility, particularly during the spring months.
In April 2025, the rollout of “Liberation Day” tariffs triggered a sharp sell-off, with the SPDR S&P 500 ETF Trust (ticker: SPY) falling into a maximum drawdown of 18.8% from peak to trough.
The following year brought another shock, as a joint U.S.-Israeli war against Iran led to a smaller but still notable 8.9% drawdown, before markets rebounded on expectations of a ceasefire.
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For investors with smaller portfolios, these declines may appear manageable. A drop of that magnitude on a $10,000 portfolio is noticeable but not life-altering.
For those with larger portfolios in the six- or seven-figure range, however, even single-digit declines can translate into significant dollar losses. Viewed in that context, market volatility can feel like years of savings erased in a short period.
“A market loss is really a forced conversation between you and your actual risk tolerance — not the one you thought you had, but the one you discover when real money is on the line,” says Matt Kaufman, senior vice president and global head of ETFs at Calamos Investments. “That’s the case for having a risk management strategy in place when times are good, as opposed to during or after the storm.”
That said, losses are part of investing. Earning returns above the risk-free rate requires accepting periods of decline along the way. Markets do not move perfectly upward in a straight line, and drawdowns are a normal feature of long-term investing.
“While most portfolio performance measures focus on annual or quarterly returns, sometimes the true test of an investor’s intestinal fortitude comes in much smaller, bite-sized windows of time,” says Mike Loukas, principal and CEO of TrueMark Investments. “In reality, stock market returns can be lumpy rather than linear, and these instances often result in emotional buy and sell decisions.”
There are, however, ways to respond. Recovery is not just about waiting for markets to rebound, but also about how investors manage their behavior, structure their portfolios and use available tools. Some approaches are psychological; others involve portfolio adjustments or tax strategies.
“As someone who’s navigated multiple market cycles, I’ve found that recovery requires both analytical discipline and psychological resilience,” says Michael Ashley Schulman, partner at Cerity Partners. “The most sophisticated investors I know view losses as tuition paid for market education.”
Here are three expert-backed insights on how to recover after a loss in the stock market:
— Staying the course.
— Averaging down.
— Tax-loss harvesting.
Staying the Course
Many asset managers, including Vanguard, advocate for staying the course as the default response to market losses. Over long periods, markets are asymmetrical in that both the magnitude and duration of gains tend to outweigh losses.
In an analysis spanning January 1980 to December 2024, Vanguard found that the average bull market delivered a 96% total return and lasted about 1,018 days. By contrast, the average bear market resulted in a 30% decline and lasted just 282 days.
Over the same period, 10 of the 20 best trading days occurred in years with negative overall returns. Missing just a handful of these days by being out of the market can significantly reduce long-term performance. At the same time, 11 of the 20 worst trading days occurred in years with positive returns, meaning that reacting to short-term losses can lead investors to exit at the wrong time.
Trying to time the market often leads investors to miss those longer, more powerful recovery periods. Selling out during declines may limit losses in the short term, but it also increases the risk of missing the recovery that follows.
“Even significant drawdowns can look like mere blips when viewed on a multi-decade chart,” Schulman explains. “The investors who ultimately succeed aren’t those who avoid all losses — they’re those who develop the temperament to weather them.”
There is also a measurable cost to panic-selling and moving into cash. Vanguard found that investors who shifted to 100% cash had a 74% probability of underperforming a balanced 60/40 portfolio after three months, by an average of 4.1%. That probability was 71% after six months, with an average underperformance of 7.4%, and 87% after a full year, with an average shortfall of 13.3%.
“In order to keep up with — or outpace — the rising cost of living, investors need equity market exposure, but not everyone can afford the risk that comes with it,” Kaufman says. “This is where a strong risk management strategy comes into play — one that keeps you positively tied to the growth and inflation protection that equity markets provide, without all of the downside risk.”
Staying invested does not eliminate volatility, but it improves the odds of capturing long-term market returns. Investors can also reframe risk, not just as short-term unrealized losses but as the possibility of falling short of the returns needed to fund long-term goals like retirement due to poorly timed decisions.
[READ: 7 Best Long-Term ETFs to Buy and Hold]
Averaging Down
Averaging down is the practice of buying more of an investment after its price has fallen, which lowers your cost basis. By adding to the position at a lower price, you lower the threshold needed to break even.
That said, there is an important distinction between averaging down and catching a falling knife. A “falling knife” refers to a security that is declining rapidly due to deteriorating fundamentals, where buying can amplify further losses. While each case is different, one way to reduce this risk is through diversification.
A study by Hendrik Bessembinder at Arizona State University found that from 1926 to 2025, just 46 companies out of nearly 30,000 accounted for half of the $91 trillion in net wealth creation. The implication is that most individual stocks underperform, which makes concentrated bets riskier.
A diversified portfolio helps mitigate that uncertainty. Holding companies across all 11 sectors, different regions including international developed and emerging markets, and across styles like value and growth increases the likelihood that some holdings will benefit from long-term economic growth.
Over time, businesses in general create value by growing earnings, expanding into new markets, acquiring competitors and realizing synergies, buying back shares when undervalued, and paying dividends that investors can reinvest.
Rather than focusing solely on whether a single stock is a bargain or a falling knife, it can be more useful to assess your overall portfolio against these factors. If it is well diversified and aligned with long-term growth drivers, averaging down during market declines can be a way to position for future compounding.
Tax-Loss Harvesting
If you review your portfolio and determine that certain losses stem from company-specific risks rather than broad market declines, it may make sense to cut those positions at a loss.
“We’ve seen people hang on to losing positions for years, holding out hope to eventually be right; this is rarely a winning strategy,” Schulman says. “To put it another way, you don’t have to eat the whole apple to realize it is rotten.”
Selling an investment below your cost basis creates a capital loss, which can be either short-term or long-term depending on how long you held the investment. Short-term losses apply to assets held for one year or less, while long-term losses apply to those held longer.
These realized losses can be used strategically to reduce your tax bill. Capital losses can offset capital gains elsewhere in your portfolio, lowering the amount of taxable profit. If your losses exceed your gains, you can also deduct up to $3,000 per year against ordinary income.
“Tax-loss harvesting can be a silver lining when the markets are turbulent,” says Lauren Wybar, a wealth advisor executive at Vanguard. “Investors cannot control the inevitable ups and downs of the markets, but they can control when to lock in losses within their portfolio.”
Moreover, capital losses do not expire. Any remaining losses can be carried forward indefinitely to offset future gains, which can be useful in years when you realize windfalls from events like asset sales or inheritances.
There are, however, important rules to follow. Capital losses are first matched by type, meaning short-term losses offset short-term gains, and long-term losses offset long-term gains.
Investors also need to be mindful of the wash sale rule. This rule disallows a tax deduction if you sell a security at a loss and repurchase the same or a substantially identical security within 30 days before or after the sale. To stay invested while avoiding a wash sale, you can either wait 30 days or reinvest in a similar, but not identical, security.
Tax-loss harvesting is easier with exchange-traded funds, where different funds can provide similar exposure while tracking different indexes. For instance, an investor could potentially sell the Vanguard Total Stock Market ETF (VTI) at a loss and immediately buy the Vanguard S&P 500 ETF (VOO).
Tax-loss harvesting can be a useful tool, but it can also become complex depending on your situation. If you are unsure how to apply these strategies, it may be worth consulting a financial advisor.
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How to Recover After a Loss in the Stock Market originally appeared on usnews.com
Update 04/30/26: This story was previously published at an earlier date and has been updated with new information.
