Don't let volatility drive you off track

We’ve experienced a worldwide pandemic, with government monetary intervention aimed at supporting markets and the economy. While these policies have been largely effective, they’ve also contributed to high inflation. Now the Federal Reserve is working to tamp down inflation through a different policy approach. When you add in the outbreak of war in Ukraine, I would argue that “atypical” markets aren’t surprising.

We might also step back and consider where the markets have been in recent years. In 2021 the S&P 500 was up 26.9%—far above the historical norm. That’s great news for those invested in the equity markets, but certainly not a sustainable growth rate.

Much of the recent strong performance can be credited to fiscal policies aimed at promoting economic recovery during a time of crisis. As we move into a post-pandemic economy, it’s only natural for things to slow down. And as investors, we’re bound to feel some bumps along the way. 

In today’s media landscape, we’re all subject to information overload, so I remind my clients to be selective about the financial information they consume and make sure it aligns with their outlook: long-term investing, staying the course, and low costs.

At Vanguard, we offer tools, education, content, resources, account types, services, and more to help you along your investing journey.

Doing nothing is a valid choice

Unless there’s been a significant change in your personal or financial circumstances, the best plan of action for long-term investors is to stay the course. That’s what I tell my clients—and it’s how I approach my own portfolio. I want my clients—and all investors—to understand that doing nothing is a legitimate choice.

This is core to the Vanguard investment philosophy, time-tested over more than 4 decades. Vanguard clients exemplify the benefits of living out our principles:

• Between November 2018 through February 2019, portfolios that remained invested saw a 10% increase over portfolios that moved to cash.*
• During the 2020 downturn, despite the increase in trading, less than 1% of households abandoned equities completely.**
  

Vanguard’s investment principles are rooted in setting clear goals, maintaining balance, minimizing cost, and staying disciplined with a long-term perspective.

And when you invest with Vanguard, you can trust we’re doing everything we can to keep your costs low, using the least expensive funds possible. When the market’s doing well, most investors don’t think about expenses. But when it’s not, expenses really matter. I try to stress the strength and value of Vanguard from that perspective. That’s why you’re here. 

Are there any benefits to market churn?

It’s also important to note there can be some silver linings to a market downturn.  Especially when it comes to rebalancing, because you may have an opportunity to buy something at a discount. Clients who were strategic and stayed the course back in 2008–2009 rebalanced their portfolios and were able to buy certain stock funds or bonds funds relatively inexpensively. Maybe you need to get out from concentrated positions. For example, if you bought some stock and its value continued to rise, you may have a huge position in your portfolio that represents a lot of risk. It may be a good time to rebalance and get back to your ideal asset allocation.

There’s also the opportunity to consider tax-loss harvesting.^† Let’s say you realized a $10,000 loss this year. The IRS allows you to carry that forward indefinitely. So if you have a big expense coming up—such as a wedding or a new car—this could be a chance to use that loss to offset some of your gains.

That’s why we shouldn’t see volatility as entirely negative. It can also present some strategic opportunities. Working with an advisor can help.