When global stock markets fall like they have this year, it can be a difficult event for investors to endure. Research suggests that the experience of a loss is psychologically more intense than that of an equally sized gain1, which is why clients will value the guidance and support of their trusted adviser now more than ever.
The truth is market downturns are part and parcel of investing over the long term. Investors that are in it for the long haul will experience several downturns, or bear markets, during their investment journey. A bear market is defined as a market decline of 20% or more lasting at least two months.
Using the MSCI AC World Index as a proxy for global stock markets, the chart below shows that since 1980 global stock market investors had already experienced five bear markets by the end of 2021.
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.
In between those bear markets were 16 ‘corrections’ (declines of 10% or more), but that didn’t stop global stock prices hitting new heights after each bear market during the period. We think this is a powerful message that highlights the value of staying invested, particularly during periods of sub-par performance.
Some clients might feel the sting of a downturn more than others, depending on their individual circumstances, but it’s critical to keep a long-term perspective and stay invested to benefit from the subsequent recovery. Some bear markets since 1980 have been sharp, but many bull-market surges have been even more dramatic. They have often also lasted longer, leaving stock market investors well compensated over the long term for the risk they took on.
It might feel counter-intuitive to stay invested in assets that are falling in value, particularly if investors suspect those losses could get worse before they get better. However, withdrawing from markets when things get choppy can mean investors forgo significant gains that would have brought them closer to their investment goals.
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: Hypothetical 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. Returns calculated in USD.
The chart shows a hypothetical example of 60/40 stock/bond portfolio during and after a sharp market downturn. The portfolio was worth $1 million on the morning of 1 November 2018 and lost 5.7% of its value by 24 December. In the scenario where the investor goes to cash on 24 December 2018 and reinvests on 2 January 2019 – shortly after markets had started to recover – the portfolio would stand at $1,009,820 on 28 February 2019.
Alternatively, if the investor had stayed the course their portfolio would stand at $1,042,046 on 28 February 2019. That’s a $30k reward for staying invested during a downturn.
The message here is that although withdrawing from falling markets might feel right at the time, the reality is that investors are likely to miss out on returns when markets recover – even if the market withdrawal is brief.
Perhaps one of the best things an investor can do when markets tumble is to tune out the noise. There’s an old saying about never checking your account when stocks are falling and it is smart advice. As the charts above show, staying invested often pays off for long-term investors.
The charts in this article are available as part of a client-friendly PDF along with other useful graphics that can help coach investors through the current downturn. Simply visit the marketing resources section under the adviser support tab on our website, where you’ll find more coaching aids and support materials.
1 Kahneman and Tversky, 1979. ‘Prospect theory: An analysis of decision under risk.’
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.
For professional investors only (as defined under the MiFID II Directive) investing for their own account (including management companies (fund of funds) and professional clients investing on behalf of their discretionary clients). In Switzerland for professional investors only. Not to be distributed to the public.
The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.
The funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. The prospectus or the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with Vanguard and any related funds.
Issued in EEA by Vanguard Group (Ireland) Limited which is regulated in Ireland by the Central Bank of Ireland.
Issued in Switzerland by Vanguard Investments Switzerland GmbH.
Issued by Vanguard Asset Management, Limited which is authourised and regulated in the UK by the Financial Conduct Authority.
© 2022 Vanguard Group (Ireland) Limited. All rights reserved.
© 2022 Vanguard Investments Switzerland GmbH. All rights reserved.
© 2022 Vanguard Asset Management, Limited. All rights reserved.