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5 Ways Investors Can Navigate Uncertain Markets


Bilal Hasanjee, CFA®, MBA, MSc Finance, Senior Investment Strategist

 

Investors have had to grapple with a series of difficult events to start the year, with heightened geopolitical risks, rising inflation, changing central bank policies and ensuing volatility in capital markets adding up to greater overall uncertainty with where the markets will be headed for the rest of 2022. 

This recent turbulence has made the role of financial advisors even more critical. In fact, recent research from Vanguard found that investors believe financial advice provides a perceived value-add of 5% to annual performance versus “going it alone”.

While investing in the stock market is typically a prudent choice for investors seeking long-term growth, sharp drops can test the patience of even the most disciplined investors. Here are five research-tested strategies to help investors navigate through periods of uncertainty and resist the temptation to “do something”. 

 

1. How Geopolitical risks affect stock returns

With a perspective of recent geopolitical events in Ukraine, investors worry that geopolitical developments may significantly impact asset returns. However, upon examining various geopolitical events over the past 60 years, we find that while equity markets may react negatively to the initial news, geopolitical selloffs are typically short-lived and returns over the following 12-month period are largely in line with long-term averages.

 

Geopolitical selloffs are typically shortlived


Notes: Returns are based on the Dow Jones Industrial Average through 1963 and the Standard & Poor’s 500 Index thereafter. All returns are price returns. Not shown in the above charts, but included in the averages, are returns after the following events: the Suez Crisis (1956), construction of the Berlin Wall (1961), assassination of President Kennedy (1963), authorization of military operations in Vietnam (1964), Israeli-Arab Six-Day War (1967), Israeli-Arab War/oil embargo (1973), Shah of Iran’s exile (1979), U.S. invasion of Grenada (1983), U.S. bombing of Libya (1986), First Gulf War (1991), President Clinton impeachment proceedings (1998), Kosovo bombings (1999), September 11 attacks (2001), multi-force intervention in Libya (2011), U.S. anti-ISIS intervention in Syria (2014), and President Trump impeachment proceedings (2019 and 2021).​

Sources: Vanguard calculations as of December 31, 2021, using data from Refinitiv.​

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.​

All investments are subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.

 

Our analysis evaluated the market reaction to 25 geopolitical events. On average, U.S. stocks had a 5% total return in the six months following an event and a 9% total return in the 12 months after an event. 

 

2. Short-term volatility and bear markets are inevitable, but a long-term focus has been a winner

Short-term volatility has always been part of investing. Extreme and extended cases of volatility have frequently coincided with market pullbacks. But investors should focus on the long term. 

Research shows that, despite periods of high volatility that have coincided with market pullbacks, equity markets have climbed over the long term. 

From December 31, 1982, through December 31, 2021, the S&P 500 and MSCI World faced several periods of extreme market volatility, most notably after the stock market crash of 1987, the global financial crisis in 2008, and the start of the COVID-19 pandemic early in 2020. However, despite sharp market pullbacks that coincided with these periods of volatility, both the indices have continued to move on to greater heights.

 

Don't let turbulence distract you: Keep your focus on the longer term

Notes: Volatility is calculated as the standard deviation of price return from trailing 30 business days for the MSCI World Price Index.​

Sources: Vanguard calculations as of December 31, 2021, using data from Refinitiv.​

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.​

All investments are subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.

 

Bear markets and corrections are unavoidable for investors, who are best served by maintaining a long-term focus. Since 1980, global stocks have endured nine bear markets, defined as a market decline of 20% or more lasting at least two months. Despite these downturns, global stock prices have continued to new heights, showing the value of staying invested even during periods of subpar performance.

3. Longer-term investing reduced likelihood of a negative return

History shows the longer investors stay invested, the less the likelihood that they will earn a negative return.

Over a 10-year holding period, a portfolio of 60% stocks and 40% bonds hasn’t had a negative nominal return (not accounting for inflation) and has had significantly less likelihood for after-inflation negative returns than over a shorter holding period. Moreover, many investors think of U.S. Treasury bills as safer than equities. But, when adjusted for inflation, Treasury bills have been more likely than stocks to have negative returns. And this finding is even more relevant in the current high-inflationary period.

 

Longer holding periods reduce the chances of a negative return

Notes: Rolling return periods based on quarterly return data. Nominal value is the value of anything expressed in money of the day, versus real value, which includes the effect of inflation. When determining which index to use and for what period, we selected the index that we deemed to be a fair representation of the characteristics of the referenced market, given the information currently available. For the U.S. stock market returns, we use the Standard & Poor’s 90 Index from 1935 through March 3, 1957, the S&P 500 Index from March 4, 1957, through 1974, the Wilshire 5000 Index from 1975 through April 22, 2005, the MSCI US Broad Market Index from April 23, 2005, through June 2, 2013, and the CRSP US Total Market Index thereafter. For the U.S. bond market returns, we use the S&P High Grade Corporate Index from 1935 through 1968, the Citigroup High Grade Index from 1969 through 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 through 1975, the Bloomberg U.S. Aggregate Bond Index from 1976 through 2009, and the Bloomberg U.S. Aggregate Float Adjusted Bond Index thereafter. For the Treasury bill returns, we used the Ibbotson 1-Month Treasury Bill Index from 1935 though 1977, and the FTSE 3-Month Treasury Bill Index thereafter.​

Sources: Vanguard calculations as of December 31, 2021.​

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.​

All investments are subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Investments in bonds are subject to interest rate, credit, and inflation risk.

 

4. Investors shouldn’t overreact to bear markets

While bear markets can be unnerving for investors, on average they have been much shorter than bull markets and have had far less of an effect on long-term performance. From January 1, 1980, through December 31, 2021, the average length of a bull market has been nearly four times that of a bear market. The depth of losses from a bear market has paled in comparison with the magnitude of bull-market gains. That’s a major reason for sticking to a long-term investing plan. Losses from a bear market have typically given way to longer and stronger gains.

 

Bear markets are challenging, but bull markets have been longer and stronger


Note: Although the downturn that began in March 2020 doesn’t meet our definition of a bear market because it lasted less than two months, we have included it in our analysis because of the magnitude of the decline.​

Sources: Vanguard calculations, using the MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI AC World Index thereafter. Indexed to 100 as of December 31, 1979.​

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.​

All investments are subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.

 

5. Investors shouldn’t try to time the market. It’s harder than it looks.

Timing the market and knowing when to pull money out and put it back in is incredibly difficult. One major reason is that investors run the risk of missing out on strong performance, which can seriously hamper long-term investment success. Historically, the best and worst trading days have tended to cluster in brief time periods, often during periods of heightened market uncertainty and distress, making the prospect of successful market-timing improbable. Our research shows that the best and worst trading days often occur within days of each other. Nine of the 20 best trading days as measured by the S&P 500 Index from January 1, 1980, through December 31, 2021, occurred during years of negative total returns. Meanwhile, 11 of the 20 worst trading days occurred in years with positive total returns, another sign of the futility of market timing.

 

Timing the market is futile: The best and worst trading days happen close together


Sources: Vanguard calculations, based on data from Refinitiv using the Standard & Poor’s 500 Price Index.​

Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

All investments are subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account.

 

Finally, as an investor, you cannot time the market and you cannot control the market. 

What you can do is control your asset allocation, diversification and your costs or the investment fees you pay. No matter the market situation, stick to four enduring investment principles 

  1. Set appropriate investment goals
  2. Develop a suitable asset allocation using broadly diversified funds 
  3. Minimize costs or your investment fees, and finally;
  4. Maintain perspective and long-term discipline. 

Put simply, stay the course!

Bilal Hasanjee, CFA®, MBA, MSc Finance is a senior investment strategist at Vanguard Investments Canada Inc.

1Sources: Vanguard and Escalent, 2021. https://www.vanguard.ca/en/investor/insights/robo-or-human-advice

 

Publication date: June 2022

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