The patient investor and the turbulent markets
You’re a patient investor. You understand that the rewards for your diligence are won over time. You’re willing to give up potential extra return because you know the importance of balance—having bonds in your portfolio because they help absorb the blow when stock markets get rocky. You’re in it for the long run.
So, what do you do when the markets seem to turn against you? I wrote just four weeks ago about equity markets that had fluctuated wildly even in the course of a single trading day. I wrote then about the several reasons to expect more volatility ahead.
What do you do when those days of markets falling and then rising give way to markets falling and then falling some more? You’re the same investor, with the same goals and the same long-term view. You haven’t changed, but have the markets? You fear they’ll keep changing, and not for the better. And they may—but not forever.
Why we look to the long term
A new dimension of risk has entered the financial markets with heightened tensions in Ukraine. It’s not something the markets needed when they were already dealing with brisk inflation and preparing for an expected cycle of interest rate hikes from most of the world’s central banks.
We know this, however, about equity markets in the context of geopolitical risks: they’ve been resilient, much as markets have always been resilient in the face of various risks. We expect the markets to work themselves out, reaching new heights over time and at varying paces. These rises will sometimes be punctuated by sharp declines. This is how it works.
So now is not the time to give up your fortitude. Now is the time to take it all in with a deep breath, knowing that this day would come—and knowing that it will pass. I wish I could tell you when it will pass. That, unfortunately, is not how it works.
In the meantime, if the markets throw your mix of stocks and bonds out of kilter, you may have a good opportunity to restore them to your desired state. Rebalancing is a useful strategy for ensuring that your asset allocation continues to suit your goals.
Two good reads from Vanguard
Vanguard’s global economics and markets team recently gave context to the economic challenges ahead with the Vanguard Economic and Market Outlook for 2022: Striking a Better Balance. It’s a captivating global story about the delicate relationship between economic stimulus and economic self-sufficiency.
For another good read, try Vanguard’s Principles for Investing Success. It’s an enduring story about maintaining perspective, tuning out the day-to-day noise that can lead to regrettable decisions, being true to your goals, and embracing the power of the long term. It’s a story about you.
All investing is subject to risk, including the possible loss of the money you invest.
Investments in bonds are subject to interest rate, credit, and inflation risk.
Rebalancing does not ensure a profit or protect against a loss.
Greg Davis, CFA, is Vanguard’s chief investment officer, responsible for the oversight of approximately $5 trillion managed by Vanguard Fixed Income, Equity Index, and Quantitative Equity Groups. The funds managed by these groups include active and index stock and bond funds, money market funds, and stable value funds. Previously, Mr. Davis was principal and global head of Vanguard Fixed Income Group, responsible for its portfolio management, strategy, credit research, trading, and planning functions. He has also served as the company’s Asia-Pacific chief investment officer and a director of Vanguard Investments Australia. Mr. Davis is a member of the Treasury Borrowing Advisory Committee of the U.S. Department of the Treasury. Mr. Davis earned a B.S. in insurance from The Pennsylvania State University and an M.B.A. in finance from The Wharton School of the University of Pennsylvania. He is a CFA® charterholder and a member of the CFA Society of Philadelphia.