With stock markets high and uncertainty all around, it’s a good time to speak to the value of long-term investing.
Markets and economy

Why talk about a market downturn now? Why not?

With stock markets high and uncertainty all around, it’s a good time to speak to the value of long-term investing.
4 minute read
  •  
February 08, 2021
Markets and economy
Market volatility
Vanguard news
Page

Vanguard believes it’s always the right time to talk about long-term investing. Now might be a particularly good time, however, with stock markets near all-time highs and uncertainty all around. Better to pulse-check now than when markets are trending lower and emotions are running high.

You may already be wondering: Are we trying to brace investors for the prospect of a market downturn? The short answer is no—and yes. “No” because we can’t predict how the markets will perform in the coming days, weeks, or even months. “Yes” because we know that sometimes-significant downturns are a given in investing. Disciplined investors accept this and cling steadfastly to their goals to weather the occasional storms.

The economy and markets are sending mixed signals

As my colleagues Josh Hirt, Alexis Gray, and Shaan Raithatha wrote recently, most major economies remain in the throes of the COVID-19 pandemic, and Vanguard expects fiscal and monetary policy to remain supportive in the months ahead. But eventually, in a still-distant future, the unwinding of support as COVID-19 is addressed and economic activity correspondingly picks up will have implications for economic fundamentals and financial markets.

Central banks have signaled their intentions to keep interest rates low well beyond 2021, but forward-looking markets will eventually price in rate hikes. This means the low rates that have helped support higher equity valuations will eventually start to rise again. Somewhat higher inflation at some point is also a risk that we’ve been discussing and that we outlined in the Vanguard Economic and Market Outlook for 2021: Approaching the Dawn.

As we also noted in our annual outlook, equity indexes in many developed markets appeared to be valued fairly but toward the upper end of our estimates of fair value. To that end, the Standard & Poor’s 500 Index finished 2020 at a record high and has done so six more times already in 2021.

Volatility that has accompanied recent high-profile speculation in a handful of stocks and even commodities only adds to the uncertainty. (Vanguard’s chief investment officer, Greg Davis, wrote recently about how investors should respond when stocks get ahead of fundamentals.)

So let’s talk about the value of long-term investing

 

Note: Intraday volatility is calculated as the daily range of trading prices ([high−low]/opening price) for the S&P 500 Index.

Sources: Vanguard calculations, based on data from Thomson Reuters Datastream.

Vanguard isn’t in the business of calling the markets’ next moves. We are in the business of preparing investors for long-term success. And that means guiding them to focus on those things they can control: having clear, appropriate investment goals; maintaining portfolios well-diversified across asset classes and regions; keeping investment costs low; and taking a long-term view.

Vanguard’s Principles for Investing Success discusses each of these principles in detail. For a time like this, I’d pay particular attention to the last of them. As the illustration above shows, market volatility is a fact of life for investors, and so are market downturns. But the market has typically rewarded disciplined investors who take a long-term view.

It’s good guidance regardless of whether a downturn may be on the horizon.

Most Viewed

Ready to invest? See how to open an account
Start with this step-by-step guide to opening a personal investment account, such as a general investing brokerage account or an IRA.
How SECURE 2.0 reforms affect retirement plans
An omnibus bill signed into law on December 29, 2022, has wide-ranging impact on retirement plans and participants.
Our 2023 economic and market outlook and you
Ryan C. Murray, a Vanguard senior financial advisor, shares his thoughts on how inflation and recession expectations and developments in fixed income and equity markets could affect your portfolio.
Introducing the Vanguard Multi-Sector Income Bond Fund
Learn how our new multi-sector bond fund can be used to complement a core fixed income position in your portfolio.
Vanguard economic and market outlook for 2023: Beating back inflation
Our base case for 2023 includes a global recession brought about by policymakers’ efforts to control inflation.
Who owns Vanguard?
Who owns Vanguard? Learn more about the only investment management company owned by investors—and how this distinction keeps us consistently focused on investor needs first.

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.