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Markets and economy

Perspective in a time of heightened volatility

Market woes continue, but history has shown that saying the course is usually the best route to success.
3 minute read
May 09, 2022
Markets and economy
Market volatility
Vanguard news
Asset mix
Cash investments
Interest rates

Stocks worldwide returned an average of –12.78% during the first four months of 2022, while bonds returned –8.47% on average.[1] Volatility has remained high in the early days of May.

Investors are challenged with how to respond—if at all—to both the simultaneous downdrafts in stocks and bonds and muted expectations for market performance. Beyond disappointing short-term returns and a spike in volatility, investors face multidecade highs in inflation across much of the globe, the prospect of the end of a long era of “easy-money” central bank policies, the war in Ukraine, and the effects of the COVID-19 pandemic, including economy-disrupting shutdowns in China. The Federal Reserve’s interest rate hike this week was a capstone to an already volatile period.

The litany of economic and market woes might tempt some investors to go all in on cash, but that would be almost ensuring a negative return when adjusted for inflation. As the charts below illustrate, the chances of a negative real return are much lower for stocks and bonds compared with cash, particularly as the holding period gets longer.

Historical probability of negative return for various holding periods

These probabilities are based on real returns.

Notes: When adjusted for inflation, U.S. Treasury bills are more likely than stocks to have negative returns. A 60/40 portfolio has 36% less volatility than a 100% stock portfolio. Rolling return periods are based on quarterly return data. Nominal value is the value expressed in money of the day, while real value includes the effect of inflation. When determining which index to use and for what period, we selected the index that we deemed to be a fair representation of the characteristics of the referenced market, given the information currently available. For stock returns, we use the Standard & Poor’s 90 Index from 1935 through March 3, 1957, the S&P 500 Index from March 4, 1957, through 1974, the Wilshire 5000 Index from 1975 through April 22, 2005, the MSCI US Broad Market Index from April 23, 2005, through June 2, 2013, and the CRSP US Total Market Index thereafter. For bond returns, we use the S&P High Grade Corporate Index from 1935 through 1968, the Citigroup High Grade Index from 1969 through 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 through 1975, the Bloomberg U.S. Aggregate Bond Index from 1976 through 2009, and the Bloomberg U.S. Aggregate Float Adjusted Bond Index thereafter. For Treasury bill returns, we used the Ibbotson 1-Month Treasury Bill Index from 1935 through 1977, and the FTSE 3-Month Treasury Bill Index thereafter.

Sources: Vanguard calculations as of December 31, 2021.

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.

Another reason to stay invested and not time the market: Historically, the best and worst trading days have come close together, making it difficult to avoid one without the other. This past week was a perfect example of that, with stock prices surging on the day of the Fed’s rate-hike announcement, followed by a plunge the next day. We should also note that some of the best trading days have occurred during periods of long market downturns, as shown in the chart below. Missing those key trading days lowers long-term returns.

S&P 500 Index daily returns (January 1, 1980, through December 31, 2021)

Sources: Vanguard calculations, based on data from Refinitiv using the Standard & Poor’s 500 Price Index.

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.

The bottom line: When it comes to your investment portfolio, patience and perspective may be the best route to success.

[1] Stocks are represented by the FTSE Global All Cap Index, which includes developed and emerging markets. Bonds are represented by the Bloomberg Global Aggregate Float-Adjusted Composite Index, which includes fixed-rate treasury, government-related, corporate, and securitized bonds from developed and emerging markets issuers with maturities of more than one year. Returns are in U.S. dollars.


All investments are 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. Investments in bonds are subject to interest rate, credit, and inflation risk.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

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