Is Market Volatility Destroying Your Portfolio? What Law Firm Owners Need to Know

In today's financial climate of proposed tariffs, shifting economic policies, and cycle uncertainty, many law firm owners are wondering if they should adjust their investment strategy. Let me share some important data that might help you maintain perspective during volatile times.

The Real Impact of Emotional Investing

Financial media thrives on creating urgency and fear. This often leads investors to make decisions based on headlines rather than historical evidence. Research consistently shows that ​reactive investing typically reduces returns by 2-4% annually​, which compounds significantly over time.

When investors react emotionally to market news, they often fall into a "buy high, sell low" pattern without realizing it. This occurs because:

1. Investors tend to feel most confident when markets reach new highs (precisely when assets are most expensive)
2. Fear is strongest during market declines (exactly when buying opportunities are most attractive)
3. The financial media amplifies both extremes, reinforcing these counterproductive behaviors

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Missing the Best Days Dramatically Impacts Returns

One of the most compelling arguments for staying invested comes from analyzing what happens when investors miss just a few key trading days:

As this data shows, if you had invested $1,000 in the S&P 500 for the entire period shown, but missed just the 5 best single trading days, your return would drop from 10.21% to 8.73% annually. Miss the 15 best days, and your return falls to 6.82%, reducing your ending value by nearly 65%.

What makes this particularly challenging is that the best trading days often occur within days of the worst ones, making them nearly impossible to predict.

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Markets Historically Recover from Declines

Many law firm owners ask me: "What happens after significant market declines?" Historical data provides a compelling answer:

Since 1926, the S&P 500 has delivered average annualized returns of 11.7% in the first year following declines of more than 10%. Over three and five-year periods, returns have averaged 10.3% and 9.6% respectively.

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Bear Markets Are Temporary, Bull Markets Remain Dominant

Looking at more severe market downturns reinforces this pattern:

Since 1929, we've experienced 16 bear markets (declines of 20% or more). In 9 of these 16 instances, investors who stayed invested recovered their losses within just one year.

While the duration of bear markets varies, this pattern demonstrates an important truth for law firm owners: No one can reliably predict the magnitude or timing of market recoveries. Following a disciplined investment approach has historically been more effective than attempting to time market movements.

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The Time Horizon Advantage

The longer your investment time horizon, the more volatility smooths out:

This chart clearly shows how the range of investment outcomes narrows over longer time periods, particularly with diversified portfolios.

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Practical Application for Your Firm's Finances

For law firm owners, I recommend structuring your investments based on when you'll need the money (This is particularly helpful if you are nearing or in retirement):

For funds needed within 1-2 years: (I call these funds your “War Chest”)

• Keep these in cash equivalents (money market funds, short-term CDs)
• Insulate from market volatility entirely

For funds needed in 3-5 years:

• Invest in high-quality bonds or fixed income
• Accept modest fluctuations for higher yields than cash

For funds not needed for 5+ years:

• Invest in diversified growth assets
• Allow for short-term volatility to capture long-term growth potential

This "time-segmented" approach allows you to:

1. Maintain sufficient liquidity for near-term needs (Market insulation)
2. Never be forced to sell growth assets during market downturns (Avoid panic)
3. Capture the higher expected returns from growth assets over time (Enjoy long-term growth)

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Next Steps

I recommend reviewing your current investment allocation to ensure it aligns with your actual time horizon for needing the funds. Many law firm owners I speak with discover they have short-term cash unnecessarily exposed to market risk, or long-term growth capital sitting in low-yield accounts.

Looking for more?

After years of guiding attorneys through their financial journeys, I've distilled the essentials into my  "5 Step Guide to Financial Freedom for Small Law Firm Owners."

This free resource addresses the unique challenges you face—from managing irregular income streams to optimizing tax strategies specific to law practice owners—and provides a clear roadmap to build wealth while growing your firm.

Remember: every day you wait to implement a financial strategy is another day compound interest isn't working in your favor.

Download the guide today, and let's start making every minute count—both in your practice and in your portfolio.