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Markets and economy

Remember: Recoveries have rewarded patience

5 minute read
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February 07, 2022
Markets and economy
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As part of our series on market volatility, we’ll show you the lifecycle of the stock market, and how—historically—good things come to those who wait out a downturn.

Market downturns are out of your control

After a long spell of positive returns, volatility and stock prices going down can come as a tremendous shock. When the financial markets suddenly are in turmoil and account balances start to fall, you may be compelled to do something—anything—to mitigate any perceived losses.

The truth is, however, these up and downs are practically guaranteed. And staying the course, even doing nothing at all, often proves to be the better strategy.

Whenever you’re investing, and especially when you’re feeling anxious about a decline in your portfolio, it’s always good to remember this basic principle: Economies and financial markets move in cycles. You can count on markets to experience lows when prices fall, and peaks when prices surge.

The chart below shows how a typical stock market lifecycle is shaped.

Source: Vanguard.

While no one has perfected the science of knowing exactly when those lows and highs will occur, you can expect the financial markets (and most global economies) will eventually come back around after a downturn.

Keep your portfolio balanced

Because of this ebb and flow, it’s especially important to maintain a diversified, properly balanced portfolio (versus a highly concentrated, nondiversified one). It can protect you more effectively from getting hit particularly hard in a downturn. When one type of asset in your portfolio is in the distribution or downtrend phase, another may be hitting its stride in the accumulation phase to make up the difference overall.

And perhaps more important: The fact that market cycles are inevitable illustrates why reactive selling in a downturn is harmful in the long run. If you sell an asset in a panic when its price is plummeting, you may be selling toward the bottom of the downtrend phase—and incur a more detrimental loss than if you had just waited it out.

Take the long view and keep a steady focus on your goals

To help you manage how you react to swings in the markets, try to zoom out and focus on the long-term trend. As you can see in the chart below, the Standard & Poor’s 500 Index—widely used as a proxy for the U.S. stock market—is a succession of volatile periods. However, despite the historical volatility, the index increased nearly 19 times in value during the period shown. Investors who jumped ship during the volatile times by selling their stock portfolios would have missed out on the impressive gains that followed the declines.

Sources: Vanguard calculations, using data from FactSet.

Volatility can also create a great opportunity to rebalance your strategic asset allocation. During turbulence, it might become possible for you to sell concentrated equity positions or high-cost active holdings with no tax penalty. Your advisor can help you plan for such opportunities and take advantage of them when they appear.

It’s difficult to overstate how important it is to follow your financial plan. Remember, the ups and downs of the financial market are not only common but expected, and we’ve designed your portfolio to withstand them. Your plan serves as a constant reminder that can guide you to the outcomes you want, independent of market conditions. Next time there’s a downtrend phase, take heart that an accumulation phase will follow. Sit tight, and you’ll reap the benefits of the recovery.

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

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.

While Vanguard Advisers, Inc., doesn't have advisors located in every state, we’re available to help you nationwide over the phone or virtually.