Goofus always makes bad decisions; Gallant always makes good decisions. In real life, however, people don’t follow a script. It’s easy to act like Gallant when the markets are up. But when markets come down, you may find yourself acting a little more like Goofus.
If you have the right mindset, you can be a smart investor under any circumstances—even in periods of market volatility.
Here are 3 common scenarios you’ll most likely encounter throughout your investing life.
Scenario 1: Choosing investments
You and your neighbor may have a lot in common, but that doesn’t necessarily mean you have similar financial goals.
Before you select funds, choose your target asset mix (or “allocation”). This is the concentration of stocks, bonds, and cash in your portfolio. It’s based on your investment goal, time frame, and risk tolerance. (Our investor questionnaire can help you find the right target asset mix.)
Your asset mix, not the individual investments you own, drives how much your portfolio gains or loses over time. To be precise, more than 90% of investment outcomes are a result of a portfolio’s asset allocation.* Think of your asset mix like a bumper in a bowling lane: It doesn’t help you knock down the pins, but it keeps you out of the gutter.
Scenario 2: Panicking after a market drop
Seeing your investments drop in value—especially when it’s sudden—can be alarming to anyone. If you give in to the temptation to sell, you’ll miss out on the opportunity to benefit from a powerful rebound. In fact, it’s possible to realize your greatest gains after a period of underperformance.
If history is any guide, a stock market rebound will follow a decline. The unknown factors are when the rebound will happen and how big it will be.
Looking back, stocks hit bottom in early 2009 during the global financial crisis. But since then, they’ve rallied to gain more than 300%.** The odds of a future rebound of this magnitude may be slim, but if you sell during a decline, the odds of recouping any losses are even slimmer.
Over the long run, the market tends to have more good days than bad. Don’t let fear of a bad day prevent you from investing on the good days.
Scenario 3: Maintaining your asset mix
When one asset class is performing better than another, your portfolio may become “overweight” in that asset class. This may sound good because it means you have more money invested in higher-performing investments. But beware: If your asset mix doesn’t match your target, you’re exposed to a different amount of risk than you originally bargained for.
If you’re overweight in stocks, you may be taking on too much risk. You may experience bigger returns … or bigger losses. If you’re overweight in bonds, you may not be taking on enough risk. This means your money may not have the opportunity to grow enough to meet your goals within your time frame.
If you don’t want to be bothered with rebalancing, you can invest in a single all-in-one mutual fund that automatically rebalances its holdings for you over time. This type of fund invests in thousands of individual stocks and bonds so you can have a well-diversified portfolio in a single investment.
There are more than 2 ways to handle any given investing scenario, but that wouldn’t make for a very good comic. Clever illustration and a clear, simple takeaway makes a good comic: Think before you act; keep your cool so you can make good decisions. But if you know you’re doomed to follow in Goofus’s footsteps during periods of market uncertainty, consider partnering with a financial advisor.
*Source: Vanguard’s Principles for Investing Success.
**Source: DQYDJ.com S&P 500 return calculator with dividend reinvestment, as of December 31, 2018.
All investing is subject to risk, including the possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss.
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.
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