In the midst of a historic downturn, Vanguard investors demonstrated the courage to commit to a long-term strategy.
Markets and economy

A snapshot of investor behavior during a downturn

In the midst of a historic downturn, Vanguard investors demonstrated the courage to commit to a long-term strategy.
4 minute read
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August 12, 2020
Markets and economy
Market volatility
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The volatility of the financial markets during the first half of 2020, punctuated by the most sudden, steep decline in U.S. market history, tested the mettle of most investors. Despite the gut-wrenching drop of nearly 34% in the S&P 500 Index in just over a month, Vanguard investors held firm, sticking with their plans and, in some cases, rebalancing into equities during the downturn. This discipline ultimately results in better outcomes over the long term.

The courage to stay the course

We’ve long professed that short-term market movements—whether up or down—should not dictate one’s investment strategy. The data show that Vanguard investors agree, and the overwhelming majority stayed invested through the recent volatility. Less than 0.5% of investors abandoned their portfolios and moved entirely to cash. A willingness to weather sudden market drops is an important part of long-term investing. Although it is a natural instinct to seek to preserve capital when the market drops precipitously, too often investors remain on the sidelines and miss the inevitable recovery.

Back in March, we reminded investors to stay the course. A balanced, diversified portfolio is built to weather tough markets. The majority of investors (83%) held fast from late February to May and didn’t transact. Even better, 9% of our clients rebalanced into the storm, buying equities and regaining their targeted asset allocations. Rebalancing helps mitigate risk, and it is a staple of our advice.

Investors in Vanguard retirement accounts have shown the lowest proclivity to trade. IRA holders and participants in defined contribution plans trade at minimal levels and far less than other cohorts. They truly keep a long-term perspective and don’t get thrown off by short-term volatility. Why is staying the course so important? As an extreme example, consider the investor who lost faith in the markets and cashed out on March 23, the low point in the U.S. stock market. Stocks subsequently rebounded more than 39% over the next three months; the unfortunate individual who moved to a money market fund earned a meager 0.14%. Our analysis found that about 85% of investors who fled to cash would have been better off if they had just held their own portfolio.

Even-keeled at all times

Just as investors should stay even-keeled during downturns, they should ignore the euphoria of a sudden surge in the market and the fear of missing out on easy gains. One byproduct of the market churn is the renaissance of day trading among individual investors. Online brokerage platforms saw new accounts spike in the early part of 2020, with many of these investors looking to capitalize on “hot” stocks or engage in speculative moves. Fortunately, the vast majority of Vanguard investors are staying disciplined and avoiding speculation. We have seen this movie before and know how it ends for the FOMO crowd—an expensive lesson about diversification.

Thank you to our clients

We would be remiss if we did not thank our clients for adhering to the Vanguard way of investing and their commitment to our company. Our investors added $130 billion in net new investments to Vanguard funds during the first seven months of 2020. Your confidence in Vanguard as your investment partner is never taken for granted, and we look forward to continuing to work with you to achieve your financial goals.

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All investing is subject to risk, including the possible loss of the money you invest.

Rebalancing and diversification do not ensure a profit or protect against a loss.

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.