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Investors around the world are feeling the full force of market volatility as portfolio values decline, with global equities and global bonds experiencing falls of around 15% and 20% respectively during the first six months of the year1.

At the same time, real returns are being eroded as headline inflation continues to rise across most developed economies.

With markets falling and inflation ramping up, clients might feel they need to ‘do something’ to avoid further losses. This reaction is natural as research suggests taking action to address a perceived threat can boost confidence and may even reinstate feelings of control to regular levels2.

However, when it comes to investments, taking action in response market turmoil may be detrimental to long-term objectives and derail a sound investment strategy. It is precisely at times like this that investors can benefit from the reassurance and guidance of a trusted adviser.

Lessons from the past

History can help put many of today’s challenges into perspective. For example, the heightened volatility we are experiencing currently is far from unusual. The chart below shows the volatility and price return of the MSCI World Index. We can see that volatility is a constant factor that tends to spike when stock markets endure a severe downturn. However, the inevitable troughs that investors will experience over time often give way to higher peaks.

History of volatility and long-term gains

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Source: Vanguard calculations, using data from Bloomberg from 10 October 2002 to 19 January 2022. Data accessed on 24 January 2022. Notes: Intraday volatility is calculated as daily range of trading prices [high-low/opening price] for the MSCI All Country World Index. Returns calculated in GBP and without dividends reinvested.

 

For this very reason clients should continue to invest to finance long-term goals, such as retirement. Clients’ long-term goals, as per Vanguard’s four principles for investing success (goals, balance, discipline and cost), should always be forefront of mind when it comes to portfolio activity.

Some investors might interpret the previous chart as an opportunity to time markets, i.e., selling assets when markets are falling and reinvesting when sentiment picks up as prices begin to rise. Timing markets is notoriously difficult to do – even for professional fund managers3 – and could easily result in missed gains.

Our research has also found that the best and worst trading days often occur close together and irrespective of the overall market performance for that year, as the next chart demonstrates.

Timing the market is futile

Source: Vanguard calculations, based on data from Refinitiv using the FTSE All Share Index. Data between 1 January 1985 and 19 January 2022. Returns calculated in GBP without dividends reinvested.

The analysis found that five of the best trading days of the past 40 years or so, as measured by the performance of the FTSE All Share Index, occurred either in the wake of the global financial crisis in 2008 or after the Covid-19 sell-off in 2020, during years of negative total returns. We think there is a clear message for clients here – that even a bad year for markets can deliver some of the best single-day returns an investor will experience in their lifetime.

Maintain a long-term perspective

History has shown that often the best response to a market downturn is to maintain discipline with a strategic allocation to global equities and global bonds commensurate with the investor’s tolerance for risk and their investment goals. Unless those goals change, investors must resist the urge to change tactics in response to current market turmoil and maintain a long-term perspective.

 

1 Source: Vanguard calculations, based on data from MSCI and Bloomberg. Global equities represented by the MSCI All Country World Index (in GBP). Global bonds represented by the Bloomberg Global Aggregate Index (in USD). Data from 3 January 2022 to 22 June 2022.

2 Landau et al., 2015. ‘Compensatory control and the appeal of a structured world’.

Vanguard calculations, using data from Morningstar. Data between 3 January 2011 and 31 December 2021. Notes: Analysis found strategic allocation funds generated higher median returns with less dispersion than funds with tactical allocations over one-, three-, five- and 10-year horizons.

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.

Important information

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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 document 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 document does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this document when making any investment decisions.

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© 2022 Vanguard Asset Management, Limited. All rights reserved.