Making the best of a market downturn

Lavern Vogel

Be prepared  To begin with, every investor should: Create or revisit investment goals, making sure they’re appropriate; Develop a suitable asset allocation using broadly diversified funds; Control cost; and Maintain perspective and long-term discipline. The first 3 steps are integral to developing a good investment plan. The fourth step is […]

Be prepared 

To begin with, every investor should:

  1. Create or revisit investment goals, making sure they’re appropriate;
  2. Develop a suitable asset allocation using broadly diversified funds;
  3. Control cost; and
  4. Maintain perspective and long-term discipline.

The first 3 steps are integral to developing a good investment plan. The fourth step is required to enjoy the potential long-term benefits of that plan. Vanguard’s Principles for Investing Success provide a detailed primer on all 4 steps. For our research on these and other issues, see Vanguard’s framework for constructing globally diversified portfolios.

Rebalance 

We also believe you should periodically adjust your holdings to keep them in line with your target asset mix.

Getting back to your target mix, or rebalancing, sounds simple but often turns out to be psychologically difficult. That’s because it requires selling assets that have performed better for you and buying those that haven’t done as well.

In market downturns, rebalancing may require investing in assets that have been losing value. “It violates our intuition,” said Stephen Utkus, Vanguard’s head of investor research, “but either staying the course or buying more of the falling asset is the economically rational action.”

Exercise patience

Investing is a long-term proposition, best-suited to the pursuit of long-term goals. Vanguard forecasts only modest gains for the 10-year period that started in the fourth quarter of 2019. We expect a globally diversified, 60% stock/40% bond portfolio to deliver annualized returns in the 3.5%–6.3% range, for example.* (For details, see our 2020 economic and financial market outlook, The New Age of Uncertainty.) Our investment strategists expect long-run gains despite an “elevated risk” of a large downturn in stocks along the way. But you have to remain invested, even in the hard times, to maximize your chance of capturing the market’s long-term potential for growth. 

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