When the markets are performing well, we’re not usually thinking about the next financial decline. But we believe that’s the best time to prepare yourself for a pullback.
In this series on market volatility, we want to arm you now with the facts and strategies you’ll need to save yourself some anxiety and stay strong during a downturn.
Nearly everywhere you turn, from friends and colleagues to cable news shows, you can find someone with a strong opinion about the financial markets. People will often use specific terms, such as correction or bear market, when market performance is choppy or trending down.
First, it’s important to realize that downturns aren't rare: Investors, in all markets, endure many during their lifetimes.
However, it can be unsettling to witness the decline of your portfolio during one of these events. After all, that account balance is more than a number—it represents important personal goals such as the ability to retire comfortably or to provide a quality education for family members. When market conditions seem to jeopardize those goals, you may feel compelled to abandon your financial plan and sell most or all of your investments. You may even be wondering if a conversion to cash will give you a better long-term result than staying invested.
No one can predict the markets, but history tells us that strong recoveries have generally followed market downturns. If you convert to cash, you may shut yourself out of the next recovery.
An advisor built your plan to account for market volatility. And if you stick with it, you should be well positioned to take advantage of the opportunities that follow. Knowing what to expect as markets cycle through their phases can help you tune out messages that don’t help your strategy.
It’s worth noting that not all financial declines are the same in length or severity. For example, the global financial crisis of 2008–2009 was an extreme anomaly. As challenging as the period was, the longest stock market recovery in U.S. history followed in the years after.
Staying the course can have its rewards
Source: Vanguard calculations, based on FactSet data, as of June 30, 2021.
Note: U.S. stocks represented by S&P 500 Index. U.S. bonds represented by Bloomberg Barclays U.S. Aggregate Bond Index. Cash is represented by the Bloomberg Barclays 3-Month US Treasury Bellwethers Index. The 50% stock/50% bond portfolio was rebalanced monthly.
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.
Stick to your plan.
The plan we've designed for you prepares you and your portfolio for financial shocks whenever they happen. Staying the course along your long-term investing journey keeps you focused on what you can control (like your asset allocation and costs) and not worrying about what you can't (downturns in the markets and economy).
Bear markets are inevitable, but they don’t last forever. As a savvy investor, you can overlook the short-term market pullbacks (and any commentary that might cause you to veer off course) and remain committed to achieving your long-term vision.
6 U.S. recessions
Declines in economic conditions for 2 or more successive quarters (refers to declines in the broad economy rather than the financial markets, though the 2 can be linked)
9 bear markets
Declines of 20% or more, lasting at least 2 months
Decline of 10% or more
Source: Vanguard as of December 31, 2020.
Note: Figures for corrections and bear markets are based on MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI AC World Index thereafter through December 31, 2020. Indexed to 100 as of December 31, 1979. Number of recessions based on GDP from January 1, 1980, www.nber.org/research/data/us-business-cycle-expansions-and-contractions.
If a market pullback happens, remember your plan takes into account the following factors:
There’s more investing advice to come in this series on market volatility. Stay tuned to discover what you can do now to absorb shocks to your portfolio if the markets trend downward.
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