How to Be a Calm Investor

A stock market historian shares what he’s learned about surviving scary times

Penelope Wang,

AARP

Comments

Published February 23, 2026

a man sits serenely on a stack of money as sun shines behind him

For people in or near retirement, try to build savings equal to five years or more of essential costs.

C.J. Burton

If you want to navigate today’s financial uncertainty, a knowledge of economic history can help. Someone with that knowledge is William Bernstein, an investment adviser and author of The Four Pillars of Investing and other books about investing and financial history. He’s been honored for his work by the premier global association of financial analysts, and he regularly speaks at industry conferences. We asked him what history has to teach us about managing our finances.

This interview has been edited for length and clarity.

With the stock market at record highs, should we be worried about a downturn?

There are warning signs to consider. We have a government that is encouraging speculation in investments such as crypto or certain stocks. We’ve never seen that before in the U.S., except perhaps with 19th-century railway speculation. I’m hearing people boast that they’re 100 percent in stocks, which is the zeitgeist you see at market tops. For the past several decades, we had an independent Federal Reserve that helped keep a lid on inflation at a cost to the economy. Now we seem to be returning to the ’60s and ’70s, when presidents tried to dominate Fed chairs to keep rates low. Back then, we had Lyndon Johnson clashing with William McChesney Martin Jr., and Richard Nixon browbeating Arthur Burns. Those efforts did not work out well, as inflation eventually soared.

But the warning signs don’t tell you when it’s time to sell. Bubbles can last a long time, and some other type of event may cause markets to drop. Of course, no one should try to time the market. But a long-term perspective on investing history helps you identify the warning signs and make sure you’re prepared to ride out crashes, which are inevitable.

Most Popular

What is the best way to protect your finances in a downturn?

The most important lesson that I’ve learned is that you don’t design your investment portfolio based on normal stock and bond returns. You design it with the worst-case scenarios in mind, such as the stock market downturns in 1929 or 1981 or 2009. History shows that the worst returns may happen only 2 percent of the time, but that 2 percent outcome can wreck your finances, especially if you panic and sell at the bottom.

The second most important thing I’ve learned is that compounding is magic, and you should never interrupt it. It’s essential to leave your money invested to grow over time. And what’s most likely to interrupt compounding? Panicking and selling in a worst-case scenario.

That means you should hold a portfolio that is much more conservative than you might think, since you’re more likely to stick with it in tough times. If your ideal portfolio is, say, 60 percent in stocks and 40 percent in bonds, you may want to shift closer to a 55-45 or 50-50 mix, depending on your circumstances.

What is the biggest risk that could derail our finances?

The biggest risk to investors in almost any historical period is inflation. We’ve all seen what’s happening in Argentina today or, in the last century, Germany’s Weimar Republic, when inflation ran rampant. Even the United States has had some really scary periods, including after World War I and during the ’70s, when inflation hit double-digit rates.

A good way to make sure your retirement income keeps up with inflation is to include Treasury Inflation-Protected Securities, or TIPS, in your portfolio. These Treasury bonds are designed to track inflation as measured by the consumer price index. You can buy TIPS through a brokerage firm. You can build a ladder of TIPS, with maturities in every year, which is what I’m doing. A free website, TIPSladder.com, can help with that. But if you prefer to keep things simple, you can opt for a TIPS mutual fund. It’s best to keep TIPS in a tax-sheltered account, since interest is paid monthly and you will pay federal taxes on the inflation adjustment.

How can you reduce financial stress during market upheavals?

You have to plan for them. There will always be times when the markets don’t deliver the returns you expected. They may even collapse. It’s hard not to react emotionally and be tempted to sell if you see your portfolio drop 40 percent or 50 percent, as happened in the global financial crisis of 2007-2009.

To help lower that anxiety, you need to be keeping enough money in safe assets to cover your spending needs during a downturn. That way, you’ll be able to sleep at night knowing you can pay your essential living costs, such as mortgage, gas and groceries, despite drops in the stock market.

If you’re employed, your risk isn’t just what might happen to your investment portfolio in a downturn or recession, but also the possibility that you might lose your job. That argues for building an emergency fund of one or two years of expenses, if you can. You should keep that money in a safe, accessible place, preferably one with a government guarantee, such as a high-yield bank savings account or Treasury bills.

For people in or near retirement, the risk is that a prolonged downturn just as you stop working might force you to sell investments near a market bottom. That might reduce your portfolio’s ability to grow, which could jeopardize your retirement. So, if at all possible, try to build savings equal to five years or more of essential costs, which can include the high-quality bonds in your portfolio.

And if you’ve retired with enough savings to see you through retirement, there’s less need to take additional risk in stocks. You’ve won the game, so stop playing.

%{postComment}%