Vanguard offers tips for long-term investing success.
Markets and economy

Making the best of a market downturn

Vanguard offers tips for long-term investing success.
6 minute read
March 02, 2020
Markets and economy
Market volatility

Knowing what not to do during a market downturn is only half the battle. What should investors do? Our counsel hasn’t changed—and it won’t change, no matter how the markets behave.

Be prepared 

To begin with, every investor should:

  1. Create or revisit investment goals, making sure they’re appropriate;
  2. Develop a suitable asset allocation using broadly diversified funds;
  3. Control cost; and
  4. Maintain perspective and long-term discipline.

The first 3 steps are integral to developing a good investment plan. The fourth step is required to enjoy the potential long-term benefits of that plan. Vanguard’s Principles for Investing Success provide a detailed primer on all 4 steps. For our research on these and other issues, see Vanguard’s framework for constructing globally diversified portfolios.


We also believe you should periodically adjust your holdings to keep them in line with your target asset mix.

Getting back to your target mix, or rebalancing, sounds simple but often turns out to be psychologically difficult. That’s because it requires selling assets that have performed better for you and buying those that haven’t done as well.

In market downturns, rebalancing may require investing in assets that have been losing value. “It violates our intuition,” said Stephen Utkus, Vanguard’s head of investor research, “but either staying the course or buying more of the falling asset is the economically rational action.”

Exercise patience

Investing is a long-term proposition, best-suited to the pursuit of long-term goals. Vanguard forecasts only modest gains for the 10-year period that started in the fourth quarter of 2019. We expect a globally diversified, 60% stock/40% bond portfolio to deliver annualized returns in the 3.5%–6.3% range, for example.1 (For details, see our 2020 economic and financial market outlook, The New Age of Uncertainty.) Our investment strategists expect long-run gains despite an “elevated risk” of a large downturn in stocks along the way. But you have to remain invested, even in the hard times, to maximize your chance of capturing the market’s long-term potential for growth. 

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1 These potential outcomes for long-term investment returns are generated by the Vanguard Capital Markets Model® (VCMM) and reflect the collective perspective of our Investment Strategy Group. Return projections exclude the effects of investment costs, taxes, and inflation. The expected risk premiums—and the uncertainty surrounding those expectations—are among a number of qualitative and quantitative inputs used in Vanguard’s investment methodology and portfolio construction process.

The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of September 30, 2019. Results from the model may vary with each use and over time.

All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Diversification does not ensure a profit or protect against a loss.

The projections and other information generated by the VCMM regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time. 

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

The VCMM is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S. Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.