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The volatility of the financial markets during the first half of 2020, punctuated by the most sudden, steep decline in US market history, tested the mettle of most investors. Despite the gut-wrenching drop of nearly 34% in the S&P 500 Index in just over a month, Vanguard’s US investors held firm, sticking with their plans and, in some cases, rebalancing into equities during the downturn. This discipline ultimately results in better outcomes over the long term.

The courage to stay the course

We’ve long professed that short-term market movements—whether up or down—should not dictate one’s investment strategy. The data show that Vanguard’s US investors agree, and the overwhelming majority stayed invested through the recent volatility. Less than 0.5% of our US investors abandoned their portfolios and moved entirely to cash. A willingness to weather sudden market drops is an important part of long-term investing. Although it is a natural instinct to seek to preserve capital when the market drops precipitously, too often investors remain on the sidelines and miss the inevitable recovery.

Back in March, we reminded investors to stay the course. A balanced, diversified portfolio is built to weather tough markets. The majority of our US investors (83%) held fast from late February to May and didn’t transact. Even better, 9% of our US clients rebalanced into the storm, buying equities and regaining their targeted asset allocations. Rebalancing helps mitigate risk, and it is a staple of our advice.

US investors in Vanguard retirement accounts have shown the lowest proclivity to trade. They truly keep a long-term perspective and don’t get thrown off by short-term volatility.

Why is staying the course so important? As an extreme example, consider the investor who lost faith in the markets and cashed out on March 23, the low point in the US stock market. Stocks subsequently rebounded more than 39% over the next three months; the unfortunate individual who moved to a money market fund earned a meager 0.14%. Our analysis found that about 85% of investors who fled to cash would have been better off if they had just held their own portfolio.

Even-keeled at all times

Just as investors should stay even-keeled during downturns, they should ignore the euphoria of a sudden surge in the market and the fear of missing out on easy gains. One byproduct of the market churn is the renaissance of day trading among individual investors. Online investment platforms saw new accounts spike in the early part of 2020, with many of these investors looking to capitalise on “hot” stocks or engage in speculative moves. Fortunately, the vast majority of Vanguard investors are staying disciplined and avoiding speculation. We have seen this movie before and know how it ends for the FOMO crowd—an expensive lesson about diversification. 

Thank you to our clients

We would be remiss if we did not thank you for helping investors stay disciplined and focused on the long run. We are here to help reinforce those best practices and are grateful for the commitment each of you has shown our company. Investors globally added $130 billion in net new investments to Vanguard funds during the first seven months of 2020. Your confidence in Vanguard as your investment partner is never taken for granted.

Important 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:

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). Not to be distributed to the public. In Switzerland, for professional investors only.

The material 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.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority. Issued by Vanguard Investments Switzerland GmbH.

© 2020 Vanguard Asset Management, Limited. All rights reserved.

© 2020 Vanguard Investments Switzerland GmbH. All rights reserved.