Why talk about a market downturn now? Why not?
Vanguard believes it’s always the right time to talk about long-term investing. Now might be a particularly good time, however, with global stock markets near all-time highs and uncertainty all around. Better to pulse-check now than when markets are trending lower and emotions are running high.
You may already be wondering: Are we trying to prepare your clients for the prospect of a market downturn? The short answer is no – and yes. “No” because we can’t predict how the markets will perform in the coming days, weeks or even months. “Yes” because we know that sometimes-significant downturns are a given in investing. Well-advised clients accept this and cling steadfastly to their goals to weather the occasional storms.
The economy and markets are sending mixed signals
Most major economies remain in the throes of the Covid-19 pandemic and Vanguard expects fiscal and monetary policy to remain supportive in the months ahead. But in a still-distant future, the unwinding of support as Covid-19 is addressed and economic activity correspondingly picks up will have implications for economic fundamentals and financial markets.
Central banks have signalled their intentions to keep interest rates low well beyond 2021 but markets, forward-looking as they are, will eventually price in rate hikes. This means the low rates that have helped support higher equity valuations will eventually start to rise again. Somewhat higher inflation at some point is also a risk that we’ve been discussing and that we outlined in the Vanguard Economic and Market Outlook for 2021.
As we also noted in our annual outlook, stock market indexes in many developed markets appeared to be valued fairly but toward the upper end of our estimates of fair value. To that end, the Standard & Poor’s 500 Index of leading US stocks finished 2020 at a record high and has done so a further eight times already in 2021.
Volatility that has accompanied recent high-profile speculation in a handful of stocks and even commodities only adds to the uncertainty, as our chief investment officer, Greg Davis, recently addressed here.
So let’s talk about the value of long-term investing
Vanguard isn’t in the business of calling the markets’ next moves. But we are in the business of preparing investors for long-term success. And that means helping you to guide clients so they can focus on the things they can control: having clear, appropriate investment goals; maintaining portfolios well-diversified across asset classes and regions; keeping investment costs low; and taking a long-term view.
Vanguard’s Principles for Investing Success discusses each of these principles in greater detail. For a time like this, I’d pay particular attention to the last of them – by reminding clients to keep their discipline.
As the illustration below shows, market volatility is a fact of life for investors, and so are market downturns.
Past performance is not a reliable indicator of future returns. Note: Volatility is calculated as the standard deviation of price return from trailing 30 business days for the MSCI World Index.
Sources: Vanguard calculations, based on data from Thomson Reuters Datastream.
The chart shows stock-market performance over nearly 40 years, with stocks rising and falling through the period but in an overall upward trend. So the market has typically rewarded disciplined investors who take a long-term view.
It is good guidance for your clients, regardless of whether a downturn may be on the horizon or not.
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.
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© 2021 Vanguard Investments Switzerland GmbH. All rights reserved.