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The S&P 500 is way, way up since the dark days of the crash, says CEO Bill McNabb, so stop fretting and enjoy the rest of the summer
August 25, 2015 — 2:54 PM UTC by Guest Columnist Bill McNabb
Brooke’s Note: You may have noticed we publish few investments-related articles. We consider our mission to be more a matter of covering the business of the business. Plenty of publications cover the markets well enough. But here is a case where somebody who has to answer to investors holding $3 trillion or so of assets has a few words to say. We’re listening — especially when the author is self-assured enough to couch things in plain English terms like “do nothing” even at the risk of sounding flip, which I seriously doubt is the case!
If you’re watching the recent market correction and wondering what to do, consider learning how to cope with volatility instead of changing your financial plan.
Often, the wisest thing to do during periods of extreme market volatility is to stick with the investment plan that you’ve already devised, notes Bill McNabb, Vanguard’s chairman and CEO.
“Equity markets have reaped sizable gains over the past six years. Such setbacks, while unnerving, are inevitable,” he says.
A “do nothing” prescription might be tough to swallow if you’ve been caught off-guard by recent volatility. But McNabb points out that no action is an active decision, and can be the right decision for reaching long-term financial goals.
Here are a few simple rules to help you through the current feverish reaction.
Rule #1: Recognize that volatility and periodic corrections are common in equity markets.
The key to getting through unexpected turbulence is to understand that swings in the financial market are normal—and relatively insignificant over the long haul. The best approach to protect portfolios is to diversify among a broad mix of global stocks and high-quality bonds so that you are better poised to buffer the declines in the equity market. See: Three ways to use social media in turbulent markets.
Year-to-date, the S&P 500 Index is down about three percentage points and up slightly on a year-over-year basis. While it may appear concerning today, the index has gained over 290% since the bottom of the financial crisis, marking it as the second-largest bull market in U.S. history.
“We’re coming off an extremely placid period in markets. So the recent spike in volatility is going to feel a lot worse,” says McNabb.
Rule #2: Tune out the noise, and remove emotion from investing.
Seeing the same story at the top of every news site you visit, as well as seeing related portfolio fluctuations, is likely to worry you more than it should. See: With fear ruling the markets, Envestnet makes a temporary conference series into a semi-permanent one.
If you’re a long-term investor, resist the urge to make drastic changes to your investment plans in reaction to market moves. You may find what’s driving the overreaction in markets is nothing more than speculation. See: A style for all markets: momentum investing.
Making shifts to your portfolio in hopes of avoiding a loss or finding a gain rarely works long-term. Investors who panicked and dumped stock holdings in 2008 and 2009, believing they could get back in when “the coast was clear,” likely suffered equity losses without the benefit of fully participating in the recovery. Vanguard research finds that a buy-and-hold approach outperformed a performance-chasing strategy by 2.8% per year on average during the 10-year period analyzed. See: John Bogle tells the Morningstar crowd just why Vanguard Group has a 'problem’ — and it starts with his dogged criticism.
Also, try not to look at your accounts every day. It’s unnecessary and may do more harm than good. Remember that portfolio changes, aside from routine rebalancing, can result in significant capital gains. And don’t forget you need to know when to jump out of the market and then get back in—decisions few investors can and should tackle. See: Why I disagree with Jack Welch about the ’08 crash as the root of employee disengagement.
Rule #3: Make volatility work for you.
Save more, and continue to invest regularly. Boosting savings is important to your long-term financial goals. We believe market returns will be muted over the next few years; therefore, stick to your investing principles and avoid getting caught up in the market. See: Rough markets cull the advisory herd but in a healthy way, new Cerulli data shows.
If you invest regularly through payroll deduction, an automatic investment plan, or a target-date fund, you’re putting the market’s natural volatility to work for you. Continue making contributions to take advantage of dollar-cost averaging. Buying a fixed dollar amount on a regular schedule offers opportunities to buy low during market dips. Over time, regular contributions can help reduce the average price you pay for your fund shares.2
The inaction plan
If your portfolio is broadly diversified and has the appropriate balance for your financial goals, time horizon, and risk comfort level, sticking with it is a wise move.
“Because no one knows what the future holds, a globally diversified strategy can be more advantageous than shifting too much in any direction,” says McNabb. “You can resist the temptation and save yourself the stress by tuning out the noise. It’s OK to ignore volatility—that’s part of the plan.”
F. William McNabb III is chairman and chief executive officer of Vanguard.
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