• Large market swings can be unsettling for some clients, particularly when their portfolios are losing value.

  • Moving portfolios into cash during times of turbulence can often lead to lower long-term returns than simply staying invested.

  • These visual aids can help advisers reassure their clients to stay the course and maintain a long-term focus when markets are falling.

 

The sudden sell-off in global markets in early August took many investors by surprise – and there could be further volatility in the months ahead.

For advisers, large market swings can prompt challenging conversations with clients, particularly when markets are falling and their portfolios are losing value.

Here, we share four key charts to help advisers encourage their clients to maintain a long-term focus and stick with their investment strategies when markets turn turbulent.

Chart 1: Don’t let turbulence distract you. Keep your focus on the longer term.

Short-term volatility is a normal part of investing. This chart shows that, despite periods of high volatility that have often coincided with market pullbacks, equity markets have climbed over the long term

This chart shows the trailing 30-day volatility of daily returns as a dark line plotted on top of the cumulative returns of global equities since 1982 to the present. As volatility has spiked and ebbed throughout the period, cumulative equity returns have risen over time.

Past performance is not a reliable indicator of future results.

Notes: The chart shows the trailing 30 business-day volatility of daily index returns (LHS) and the price index (RHS) of the MSCI World Price Index from 1 January 1982 to 31 December 1987 and the MSCI AC World Price Index thereafter.

Source: Vanguard calculations in EUR, based on data from Refinitiv, as at 3 July 2024.

Chart 2: Downturns aren’t rare events. Typical investors will endure many of them during their lifetime.

Bear markets and corrections are a part of life for investors, who are best served by maintaining a long-term focus.

Since 1972, there have been ten bear markets in global equities, from a euro investor’s perspective. History shows that equities typically recover and go on to post strong results over the long term.

This chart shows global stock prices since 1972 to the present, with time periods representing bear markets shaded grey (defined as a price decrease of more than 20% from the previous peak to the trough). Despite several bear markets, global equity prices have eventually recovered and increased over time.

Past performance is not a reliable indicator of future results.

Notes: The chart shows the MSCI World Price Index from 1 January 1972 to 31 December 1987 and the MSCI AC World Price Index thereafter. The shaded areas represent bear markets, defined as price decreases of more than 20% from the previous peak to the trough.

Source: Vanguard calculations in EUR, based on data from Refinitiv, as at 3 July 2024.

Chart 3: Timing the market is futile. The best and worst trading days often happen close together.

One reason investors shouldn’t try to time the market is they run the risk of missing out on strong performance, which can seriously hamper long-term investment success.

Historically, the best and worst trading days have tended to cluster in brief time periods, often during periods of heightened market uncertainty and distress, making the prospect of successfully timing the market improbable.

The chart shows daily global stock price returns from 1980 to the present. The vertical axis is labelled ‘Price return’ with numbers from -15% to +15%. The returns are shown as thin vertical bars. The gold bars shows the 20 worst trading days and the green bars show the 20 best trading days. The majority of the best trading days occurred in years with negative returns and the worst trading days often happened in years with positive returns.

Past performance is not a reliable indicator of future results.

Notes: The chart shows daily returns of the MSCI World Price Index from 1 January 1980 to 31 December 1987 and the MSCI AC World Price Index thereafter. The green bars highlight the 20 best trading days since 1 January 1980 and the gold bars highlight the 20 worst trading days since 1 January 1980.

Source: Vanguard calculations in EUR, based on data from Refinitiv, as at 3 July 2024.

Chart 4: Don’t panic-sell during market turmoil.

Fast and significant market downturns are infrequent. When they do occur, investors can feel frightened and move their portfolios into cash - an action made doubly challenging by then having to pick the right time to move back into the market. Long periods out of the market can end up making matters worse.

The chart features three circles that show the probability of underperforming a 60%/40% equity/fixed income portfolio by moving into cash during periods of market stress since 1990 to the present. The circles represent cash investment holding periods of 3-, 6- and 12-month time periods following a market downturn. If an investor switched into cash for 3 months, the chances of underperforming a 60/40 portfolio were 58% with a median average return of -1.7%; for six months they were 53% and -1.4%; and for 12 months in cash, the probability of underperformance was 60% and the average median return was -6.7%.

Past performance is not a reliable indicator of future results.

Notes: The chart shows the distribution of excess returns of cash over a global 60% equity / 40% fixed income portfolio over the 3-, 6- and 12-month periods after 3-month total returns of global equities were below 5%. Equity comprises global equities (MSCI AC World Total Return Index). Fixed income comprises global bonds (hedged) (Bloomberg Global Aggregate Bond Index Euro Hedged). Cash is represented by Euro 3-month deposits, which mirrors what an individual could get in a 3-month fixed-rate savings account. Data based on the period between 28 February 1999 and 30 June 2024.

Source: Vanguard calculations in EUR, based on data from Refinitiv, as at 3 July 2024.

What to do when volatility hits

Use Vanguard’s five simple investing tips with your clients to help them avoid overreacting to short-term downturns and stay on course for long-term investment success.

Tune out the noise

There's an old adage that you should never check your account when stocks are tanking. It's smart advice. As the charts above show, making a hasty decision usually results in a mistake.

Revisit your asset allocation

If market corrections are making you lose sleep, it may be time to reevaluate your risk tolerance

Control what you can: costs

Expenses erode your returns. This is particularly painful when stock markets are correcting.

Set realistic expectations

Historical return averages are simply that–averages–and returns could be lower in any given year.

Stay diversified

A great way to insulate your portfolio is to have exposures to stocks, bonds and international markets in an asset allocation plan that makes sense for your risk tolerance and goals. Bonds can act as a ballast during downturns. International exposure can give you access to markets that may generate positive performance when others are falling.
 

Discipline may be the best defence in a downturn

Download our client-friendly coaching aid to help guide investors through volatile markets.

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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.

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