Investing in shares means taking a greater risk than you would otherwise do if you left your money in cash. It means risking a loss in search of a better return. Why? Because stock markets go down as well as up. And sometimes they even fall sharply for extended periods of time.

The chart below illustrates that by showing how global shares, collectively, experienced declines of 10% or more on 15 separate occasions in the last 40 years.

What goes up sometimes goes down

Global Stock Prices, GBP, January 1, 1980 to Sept 29, 2021

Past performance is no guarantee of future returns. Source: Bloomberg data, Vanguard analysis based on the MSCI World Index from 1 January 1980, through 31 December 1987, and the MSCI AC World Index thereafter. Both indices are denominated in GBP. Our count of corrections excludes those that turn into a bear market. We count corrections that occur after a bear market has recovered from its trough even if stock prices haven't yet reached their previous peak.

So, what should investors do when the inevitable downturns happen? The answer is to stay the course.

Keep your discipline

Vanguard’s fourth rule of investing is about keeping your discipline. While the first three focus on getting you to think about what you want to achieve and how you can best achieve it, the fourth is all about what you should do once you’ve decided on your investment strategy and are pursuing it.

We know how volatile markets can be and how it’s impossible to know, with any certainty, what lies around the next corner. It’s why we believe a balanced and globally diversified, low-cost portfolio that spreads your investment risks and is aligned with your goals can help you achieve superior outcomes.

It’s also why we believe it is important to trust the process by keeping your cool when markets turn against you. Because if you’re in it for the long-term, you can afford to ride out any storms. Otherwise, you run the very real danger of converting a paper loss into a real loss and then compounding the error by being on the side lines when the market recovers.

Don’t panic

I’ve found that even the most experienced of investors can sometimes let their emotions rule their heads, with negative consequences for their finances. Some may panic sell during market downturns, but then wait too long to reinvest, potentially missing out on significant profits when markets rebound.

Academic research shows this too1, suggesting how many of these investors may be inclined to believe they can time the market, by selling high and buying low.

Trouble is, as the chart below shows, many of the best ‘up’ days are often situated close to the worst ‘down’ days, so it is very hard to time the market.

Why trying to time the market is futile

Past performance is no guarantee of future returns. Source: Vanguard calculations, based on data from Bloomberg using the MSCI All-Country index denominated in GBP as a proxy for global stock markets. Period covered: 1 Dec 1987 through 29 Sept 2021.

Downturns aren’t rare events: Most investors, in all markets, will usually encounter several during their lifetime.

It’s all the more reason to remember to keep calm and carry on.

 

¹ For example, Daniel Elkind, Kathryn Kaminski, Andrew Lo, Kien Wei Siah and Chi Heem Wong, When Do Investors Freak Out?: Machine Learning Predictions of Panic Selling, August 2021