How to Navigate Market Sell-Offs Without Undermining Long-Term Returns

AI chips rally while software stocks stumble – markets split on automation's winners and losers.

The quick scan: Markets rose modestly Monday as AI infrastructure companies surged while software stocks extended their selloff, creating a clear divide between those building AI tools and those vulnerable to being replaced by them.

S&P 500: +0.47% to 6,964.82 – tech-led gains pushed the index to its second consecutive advance, though the rally was narrower than Friday's furious rebound
Dow Jones: +0.04% to 50,135.87 – the blue-chip index eked out a fresh all-time closing high despite minimal movement, continuing its record-breaking streak above the 50,000 milestone
NASDAQ: +0.90% to 23,238.67 – semiconductor stocks drove outsized gains as Nvidia and Broadcom rose 2.5% and 3.3% respectively, while Oracle soared 9% on an upgrade.

What's driving it: The market's split personality reflects deepening anxiety about AI's creative destruction. Chip makers and AI infrastructure companies rallied on expectations of continued spending, while software stocks like Intuit and Salesforce fell over 2% each as Anthropic's automation tools raised existential questions about traditional software's future. Meanwhile, NY Fed data showed inflation expectations falling to a six-month low, and Japan's Nikkei crossed 56,000 for the first time after a landslide election victory.

Bottom line: When markets divide sharply between AI builders and AI victims, retirees with concentrated tech holdings should ask themselves: do I own the infrastructure that benefits from disruption, or the companies that might be disrupted? Diversification matters most when the winners and losers within the same sector become this obvious.

The Most Damaging Mistake During Market Sell-Offs

The scoop: Sell-offs follow recognizable patterns. Shares that previously drove market gains, especially high-valuation growth and technology stocks, are often first to be sold as investors reduce risk. Capital rotates towards defensive sectors with steadier demand and cash flows – healthcare, consumer staples, utilities.

This isn't a flight from markets. It's a recalibration of risk tolerance.

Risk-off periods also trigger flight-to-safety behavior. Investors move into high-quality sovereign bonds, including US Treasuries and other liquid government securities. For Singapore investors, this matters because portfolio resilience is often shaped by the much larger and more liquid global bond markets, even as SGD-denominated bonds remain important for currency alignment and domestic stability.

Commodities send mixed signals. Oil prices can fall during global growth scares yet rise during geopolitical disruptions or supply constraints, complicating inflation expectations for a trade and energy import-dependent economy. Gold often behaves differently, tending to attract safe-haven flows during periods of financial stress or geopolitical uncertainty.

Policy uncertainty is often a key trigger. Trade restrictions, industrial policy, and regulatory shifts combine higher costs with reduced visibility, prompting rapid repricing. For Singapore, where growth is closely tied to global trade flows and regional supply chains, such uncertainty can have an outsized impact on sentiment.

Valuations also play a role. When global equities are priced for optimism, even modest increases in uncertainty can lead to sharper drawdowns because there's little margin for disappointment.

Another critical factor is bond behavior. Investors often expect bonds to hedge equity risk, but this depends on the inflation regime. When inflation risks dominate, stock and bond returns can move together, weakening diversification benefits. A sell-off driven by persistent inflation, as we saw in 2022, will therefore behave very differently from one driven by slowing growth.

Staying Prepared and Disciplined

The most effective time to prepare for a sell-off is when markets are calm. A resilient approach starts with strategic asset allocation aligned with long-term goals, time horizons and risk tolerance. For Singapore investors, this often means managing across regular portfolios and in some cases CPF-linked assets with different liquidity and risk characteristics.

Disciplined rebalancing, rather than reacting to headlines, helps keep portfolios aligned with their intended risk profile. Many investors structure portfolios using a core-satellite approach, where a diversified core provides long-term stability while smaller satellite allocations allow for tactical or thematic exposure.

Two practical preparations reduce the risk of forced selling. First, liquidity planning ensures near-term spending needs are met without relying on selling volatile assets during market stress. Second, pre-defined rebalancing rules clarify what action will be taken and when, so decisions are not improvised mid-sell-off.

When Markets Fall

When markets fall, urgency increases. The first task is distinguishing between a liquidity problem and an asset-price problem. Most long-term investors face the latter. Turning it into the former by selling assets under pressure is often the most damaging mistake.

Remaining invested matters because market rebounds tend to cluster around periods of high volatility. Missing a small number of strong recovery days can significantly reduce long-term returns, particularly for investors tempted to move to cash during uncertainty. For those deploying capital or rebalancing back to target allocations, phased entry can be more practical than attempting to time the bottom, helping investors stay disciplined when volatility remains elevated.

High-quality sovereign bonds have historically provided meaningful diversification and downside protection during risk-off episodes, particularly when growth concerns dominate. While their stabilizing role is not as apparent during rare inflation-driven periods such as 2022, these episodes have been the exception rather than the rule.

Gold can provide diversification during certain stress regimes, particularly geopolitical ones, but it is not a universal hedge as we have seen very recently. Structured products and private market assets can help cushion some downside risk, though their liquidity features and structural complexity can become constraints during market downturns, when flexibility and clarity matter most.

The Psychological Test

Ultimately, sell-offs are psychological tests as much as financial ones. Pre-committing to a narrow set of permitted actions and explicitly ruling out panic-driven decisions can help preserve discipline. Markets often move on expectations and confidence well before economic data confirms a slowdown, which explains why volatility can feel disconnected from fundamentals.

In that context, doing nothing, when it aligns with a well-designed plan, is often an active and disciplined choice. For Singapore investors navigating global uncertainty, restraint can be one of the most valuable decisions they make.

Actionable Takeaways for L-Plate Retirees:

• Prepare during calm markets, not during chaos: The most effective time to build resilience is when markets are stable – strategic asset allocation aligned with your time horizon and risk tolerance should be decided before sell-offs occur, not improvised during them.

• Distinguish between liquidity problems and asset-price problems: Most long-term investors face falling asset prices, not actual liquidity needs – turning the former into the latter by selling under pressure is often the most damaging mistake you can make.

• Build liquidity buffers to avoid forced selling: Ensure near-term spending needs (12-24 months) are met through cash or stable assets so you never have to sell volatile investments during market stress – this single preparation eliminates most panic-driven decisions.

• Use pre-defined rebalancing rules, not headlines: Decide in advance what triggers rebalancing (e.g., when equities fall 10% below target allocation) so decisions are mechanical rather than emotional – this removes improvisation during high-stress periods.

• Understand that bonds don't always hedge equities: High-quality sovereign bonds provide diversification during growth-driven sell-offs, but during inflation-driven downturns like 2022, stocks and bonds can fall together – know which regime you're in before assuming diversification will work.

• Missing recovery days destroys long-term returns: Market rebounds cluster around periods of high volatility, and missing just a few strong recovery days significantly reduces long-term returns – moving to cash during uncertainty is usually more costly than riding out the volatility.

Your Turn:
Do you have liquidity buffers covering 12-24 months of spending, or would a market sell-off force you to sell assets at depressed prices?
Have you pre-committed to specific rebalancing rules that tell you exactly what to do when markets fall 10%, 20%, or 30% – or would you be making it up as you go?
When markets crashed in 2022 and both stocks and bonds fell together, did you understand why diversification failed, or were you surprised that the supposed hedge didn't work?

👉 Hit reply and share your thoughts – your answers could inspire fellow readers in future issues.

If this newsletter helped you see that preparation matters more than prediction – and that the most damaging mistake is turning an asset-price problem into a liquidity problem by selling under pressure – consider supporting L-PLate Retiree on Ko-fi. Your support helps me focus on what actually protects long-term returns.

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