When it comes to investing – and probably most things in life – one of the key things to remember is that you cannot know, and you cannot control, everything.

Nobody knows which sectors will be next year’s winners, just as nobody can foresee whether a market downturn is round the corner. What you can control though, is your own response, if and when that happens.

To be disciplined is one of the most important traits you should possess as an investor. It is also one of Vanguard’s four investing principles, and for good reason.

Sometimes our emotions can lead us to make simple mistakes and we can all too easily give in to impulsive behaviours. Being driven by fear and greed is common, and may have been important for human survival, but it can be incredibly damaging when it comes to investing.

Jumping on the bandwagon to buy the latest popular company shares or funds (when prices are likely to be high) or panic-selling during a crash may seem like the right thing to do in the moment, but they are potentially the opposite of what you should do.

Staying invested over the long-term tends to offer investors a better chance of achieving their financial goals, rather than trying to tactically time the best time to buy and sell.

No knee-jerk reactions

In fact, history suggests that investors who ride out volatile markets (when there can be sharp swings in prices) and stick with their investments in good times and bad, are likely to be rewarded for their patience.

But why is that? As the chart below demonstrates, some of the market’s worst and best trading days have tended to occur close together. This makes it hard to time the markets successfully, even for professional investors. If you miss the bad days, the chances are you’ll miss the good ones as well.

While some investors might be tempted to withdraw to cash when markets fall, they risk missing out on serious gains during the recovery, which can sometimes even take place just a few days after the downturn.

It’s also worth bearing in mind the best trading days can often occur in the midst of a downturn and vice versa.  Since 1980, 12 of the 20 best trading days have occurred in years with negative returns while 6 of the 20 worst trading days occurred in years with positive returns.

Timing the market is futile

Source: Vanguard

Past performance is not a reliable indicator of future results.

Notes: The chart shows daily returns of the FTSE All Share Price Index. The yellow bars highlight the 20 best trading days since 1 January 1980 and the teal bars highlight the 20 worst trading days since 1 January 1980.

Source: Vanguard calculations in GBP, based on data from Refinitiv, as at 5 July 2023.

Long-term perspective

It is also worth bearing in mind that while bear markets – defined as experiencing a fall of more than 20% in share prices – are indeed challenging, historically they have been short-lived in comparison to the longer-term growth that global stock markets have delivered.

The chart below shows that over the past 70 years, the average bull market – when share prices rise by 20% or more – has returned 120% and lasted around six and a half years. Meanwhile, the average bear market has lasted just over a year and returns have fallen 43%.

Bull markets have been longer and stronger

Source: Vanguard

Past performance is not a reliable indicator of future results.

Notes: Calculations are based on FTSE All Share and data aggregated from Global Financial Data since 1 January 1950, using monthly data. A bear (bull) market is defined as a price decrease (increase) of more than 20%. The plotted areas depict the losses / gains ranging from the minimum following a 20% loss to the respective maximum following a 20% appreciation in the underlying index.

Source: Vanguard calculations in GBP, based on data from Global Financial Data and Bloomberg, as at 31 December 2022.

That’s why we encourage investors to build a portfolio that matches their goals and attitude to risk (in terms of the balance of global shares and bonds) and then stick with it over the long term.

Stay grounded over greed

At times, it may be tempting to top up your portfolio with good-performing funds and to ignore, or even cut, those in your portfolio that aren’t doing well.

But in doing this, you could end up with a higher ratio of investments that do not match your attitude to risk, and therefore compromise the success of your investment plan and the need to stay balanced – the first and second of our investing principles.

That’s why a well-disciplined approach to investing also involves rebalancing your portfolio from time to time.

It can be hard to stick with your plan when there is a lot of short-term noise, but doing so avoids knee-jerk reactions and, as our charts show, has tended to pay off over the long-term.