Discipline may be the best defence in market downturns
While investing in the stock market is typically a sensible 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 bear markets during their lifetime. A bear market refers to market declines of 20% or more lasting at least two months.
Source: Vanguard analysis as at 31 December 2021, based on the MSCI World Index from 1 January 1980 until 31 December 1987, and the MSCI AC World Index thereafter. Notes: Both indices are denominated in GBP.
Timing the market is futile
Trying to time the market runs the risk of missing the best-performing days. The best and worst trading days often happen close together and occur irrespective of the overall market performance for the year.
Source: Vanguard calculations, based on data from Refinitiv using the FTSE All Share Index. Data between 1 January 1985 and 19 January 2022. All returns denominated in GBP.
Performance among asset classes can vary
Broad diversification keeps you from having too much exposure to the worst-performing areas of the market in the event of a downturn.
Source: Vanguard calculations as at 31 December 2021, using data from Barclays Capital and Thompson Reuters Datastream and FactSet. Global shares represented by the FTSE All World Index, North American shares by the FTSE World North America Index, emerging market shares by the FTSE All-World Emerging Index, developed Asia shares by the FTSE All World Developed Asia Pacific Index, European shares by the FTSE All World Europe ex-UK Index, UK shares by the FTSE All Share Index, UK government bonds by the Bloomberg Sterling Gilt Index, UK index-linked gilts by the Bloomberg UK Govt Inflation-Linked UK Index, UK investment grade corporate bonds by the Bloomberg Sterling Aggregate Non-Gilts – Corporate Index, hedged global bonds as Bloomberg Global Aggregate Index (hedged in GBP). Performance shown is cumulative and denominated in GBP. It includes the reinvestment of all dividends and any capital gains distributions.
Staying the course pays off
The chart below uses US data, but the broad findings we draw from it generally holds across markets – that riding out the rough periods can pay off. The time period shown is for illustrative purposes.
Source: Vanguard calculations, using data from FactSet. Data between 1 November 2018 and 28 February 2019. Notes: This chart shows the performance of a hypothetical example 60% stock/40% bond portfolio, including US stocks, global ex-US stocks, US bonds and global ex-US bonds, during and after a sharp market downturn. US stocks represented by the CRSP US Total Market Index. US 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.
Investment risk information: The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results. Simulated past performance is not a reliable indicator of future results.
Vanguard, March 2022
