Staying the Course…Investing | Vanguard

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“The volatility of the financial markets during the first half of 2020, punctuated by the most sudden, steep decline in U.S. 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 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.”

Tim Buckley, Vanguard Chairman and CEO

“Stay the course” doesn’t mean do nothing during market volatility or drop. It means stick to your investment plan. If you’re a long term investor or retired, focus on what you can control, such as your spending and asset mix.

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 2020 during the height of stock market volatility and as many retail investors sold stocks in a panic, most financial experts reminded investors to stay the course. They reminded investors that a balanced, diversified portfolio is built to weather tough markets. The majority of investors (83%) held fast from late February to May and didn’t transact. Even better, 9% of their clients rebalanced into the storm, buying equities and regaining their targeted asset allocations. Rebalancing helps mitigate risk, and it is a staple of their advice.

They strongly recommended keeping 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 U.S. 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.

Additionally, just as investors should stay even-keeled during stock market downturns, they should ignore the euphoria of a sudden surge in the market and the fear of missing out on easy gains from investing in stocks such as Tesla, Apple or SalesForce.

Staying the course isn’t easy. Instead, focus on what you can do during market volatility, and you (and your portfolio) can get through difficult times of market volatility and declines. Nobody wants to spend less because the market is down. But you can control what you spend.

References:

  1. https://investornews.vanguard/what-stay-the-course-means-if-youre-retired/
  2. https://investornews.vanguard/staying-the-course-really-matters/
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