While investing in the stock market is typically a prudent choice for investors seeking long-term growth, sharp drops can still be hard to stomach. Below are some things to keep in mind if a market tumble makes you feel the need to "do something."
Downturns aren't rare events: Typical investors, in all markets, will endure many of them during their lifetime.
Note: Although the downturns that began in August 1987 (related to Black Monday) and February 2020 (related to the start of the COVID-19 pandemic) don't meet a widely accepted definition of a bear market because they lasted less than two months, we're counting them as bear markets and including them in our analysis because of their historic nature. 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.
Sources: Vanguard calculations, as of December 31, 2022. MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI ACWI thereafter.
Dramatic market losses can sting, but it's important to keep a long-term perspective and stay invested to participate in the recoveries that typically follow.
Some bear markets since 1980 have been sharp, but many bull market surges have been even more dramatic, and often longer, leaving stock investors well compensated over the long term for the risk they took on.
Global stock prices (January 1, 1980, through December 31, 2022)
Note: Although the downturns that began in August 1987 (related to Black Monday) and February 2020 (related to the start of the COVID-19 pandemic) don't meet a widely accepted definition of a bear market because they lasted less than two months, we're counting them as bear markets and including them in our analysis because of their historic nature. 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.
Sources: Vanguard calculations, as of December 31, 2022, using the MSCI World Index from January 1, 1980, through December 3, 1987, and the MSCI ACWI thereafter. Indexed to 100 as of December 31, 1979.
Timing the market is futile; the best and worst trading days often happen close together.
Sources: Vanguard calculations as of December 31, 2022, 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.
As the random pattern of returns below highlights, predicting which segments of the markets will do well is also a tough order.
Broad diversification keeps you from having too much exposure to the worst-performing areas of the market in the event of a downturn.
Sources: Vanguard and FactSet, as of December 31, 2021.
Note: Sub-asset classes include large-cap equity as measured by the S&P 500 Index, small-cap equity as measured by the Russell 2000 Index, developed ex-U.S. equity as measured by the FTSE Developed ex-North America Index, emerging markets equity as measured by the FTSE Emerging Markets Index, U.S. fixed income as measured by the Bloomberg U.S. Aggregate Bond Index, global ex-U.S. fixed income as measured by the Bloomberg Global Aggregate ex-U.S. Bond Index, high-yield fixed income as measured by the Bloomberg Global High Yield Bond Index, and real estate as measured by the FTSE EPRA/NAREIT Developed REIT Index.
Riding out the rough periods can pay off. That includes rebalancing into asset classes even when they're declining instead of pulling out of the market.
Notes: This chart shows the performance of a hypothetical example 60% stock/40% bond portfolio during and after a sharp market downturn. U.S. stocks represented by the CRSP US Total Market Index. U.S. bonds represented by the Bloomberg U.S. Aggregate Float Adjusted Index. Global stocks represented by the FTSE Global All Cap ex US Index. Global bonds represented by the Bloomberg Global Aggregate ex-USD Float-Adjusted RIC Capped Index.
Sources: Vanguard calculations, using data from FactSet, as of February 28, 2019.
What you can do when volatility hits:
Following these simple steps can help you avoid overreacting to short-term downturns and position you for long-term success.
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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. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
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.