Skip to Content

Georgina Yarwood, Investment Analyst, Investment Strategy Group

The unfolding global Covid-19 pandemic precipitated elevated levels of market volatility during the first half of 2020. US equity markets reached a peak on February 19; fell 34% in subsequent weeks, bottomed out on March 23; then rose 36% to the end of May1. The associated lockdowns have caused the sharpest and deepest short-term economic contraction in modern history2.

How should investors saving for the long-term respond to these conditions?

Focus on the things that can be controlled

Vanguard’s overarching investment guidance has always been - focus on those things that can be controlled. It’s easy to get caught up in what is happening in the markets, the economy, manager ratings or the performance of an individual security or strategy. This can lead investors to overlook enduring fundamental principles of investing such as setting clear, appropriate investment goals; having a suitable asset allocation using broadly diversified funds; minimising cost; and maintaining perspective and long-term discipline.

Take the point on costs. It’s a timely reminder that the lower the costs, the greater the share of an investment’s return an investor can retain. And the effect is magnified when the compounding of returns is taken into consideration. Indexed investments can be a useful tool for cost control, as index funds can offer some of the lowest costs in the investment industry3.

It can be difficult for investors to resist the temptation to tamper with portfolios – especially when the markets are experiencing a rollercoaster as unusual as Covid-19. In research examining the behaviour of a small subset of Vanguard’s US-based investors during the recent market turmoil4, it’s interesting to note what happened to the very small minority — there was less than 0.5% who panicked and traded to hold an all-cash portfolio between February 19 and May 31.

Our research calculated the difference between the returns they achieved when they moved into cash with the returns they would have achieved if they had left their portfolios in their pre-panic composition. It showed that more than 80% of those who panicked and sold out of equities to hold cash would have been better off had they simply retained the portfolios they held on February 18, 2020.

Actual total returns of cash panickers compared with buy and hold

Vanguard self-directed households who traded and maintained an all-cash portfolio between February 19, 2020, and May 31, 2020

Actual total returns of cash panickers compared with buy and hold

Notes: Actual realised returns are individually calculated for each household. Position-level daily total returns are weighted by assets using the portfolio composition in effect at the prior day’s close. Personal pre-panic benchmark returns are individually calculated for each household using the position-level daily total returns, weighted by assets using the portfolio composition in effect on February 18, 2020, at the close of day. Personal pre-panic benchmark returns represent the return that would have been earned if the investor had not panicked and moved to cash, but instead kept her portfolio as it was on February 18, 2020 (reinvesting all dividends). ‘DC’ refers to self-directed defined-contribution plan participants. Source: Vanguard, 2020.

Trading in response to market volatility requires getting two timing decisions correct: when to exit markets and when to re-enter them. A number of studies have addressed the difficulties of getting the timing right3. The results are discouraging for proponents of market-timing. Investors should take heed of these lessons as the second half of this year will unlikely be without volatility.

Take a long-term view

Another study5 examined the changes in Vanguard’s US investors’ household wealth during the first quarter of 2020. As expected, wealth changes varied with underlying equity allocations. Households with no equity allocation had, unsurprisingly, essentially no change in wealth. At the other extreme, investors with all-equity allocations had wealth declines of 20%—a figure nearly identical to the return of the S&P 500 Index.

When the time frame was extended to cover the one-year period ended 31 March 2020, declines were more muted. When it was widened to three years, nearly all investors saw increases in wealth; a hypothetical 70/30 balanced portfolio containing 70% equity and 30% bonds would have grown by 12.4% over the three-year period ended March 31, 20205.

The research suggests that investors should take a long-term view in thinking about market shocks and portfolio wealth. Widening the time frame can provide the psychological peace of mind necessary to avoid overreacting to short-term events, including those associated with the current pandemic.


1 As measured by the S&P 500.

2 See the 2020 Vanguard research paper Vanguard Economic and Outlook 2020 Midyear Update: Forecasting in the Time of Coronavirus, available at

3 Vanguard’s Principles for Investing Success, June 2020

4 Cash panickers: Coronavirus market volatility 30.07 2020

5 U.S. investor wealth changes during Coronavirus market volatility: Widening the frame. Vanguard 05/11/2020

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.

Other 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). 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.

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.