Large market pullbacks aren’t rare. Research from Vanguard Investment Strategy Group shows that since 1980, a significant market event—a correction or bear market, for example—has happened about every 2 years. So you’ll likely endure many of these events over your lifetime. In the current environment, a market correction—defined as a 10% drop from a peak—would mean, for example, the S&P 500 would sink to around 2,585.

It’s important to put these losses into context. Making investment decisions to try to insulate yourself from turmoil can lead to costly mistakes, as these graphs show.

Note: Unless otherwise stated, data are for the S&P 500 Index. Vanguard believes the assertions in this article would hold if international data were used.

Downturns aren’t rare events. You’ll likely endure many of them, in all markets, during your lifetime.

Global stock prices January 1, 1980 to present

1Source: Vanguard analysis based on the MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI AC World Index thereafter. Both indexes are denominated in U.S. dollars. Our count of corrections excludes those that turned into a bear market. We counted corrections that occurred after a bear market had recovered from its trough even if stock prices hadn’t yet reached their previous peak.


Dramatic losses can sting, but it’s important to keep a long-term perspective if you don’t need the money soon
Take the long view

2Notes: Intraday volatility is calculated as the daily range of trading prices [(high–low)/opening price] for the S&P 500 Index.
Source: Vanguard calculations, using data from Yahoo! Finance.


Timing the market is futile. The best and worst trading days happen close together.
S&P 500 Index daily returns, December 31, 1979, through January 31, 2018

3Source: Vanguard.


Staying the course (and rebalancing) can pay off. But altering your asset allocation can be costly. 
Value of $1,000 invested on Otober 9, 2007 (pre-crisis peak) through February 5, 2018

4Balanced portfolio is represented by 60% S&P 500 Index and 40% Bloomberg Barclays U.S. Aggregate Bond Index; bonds are represented by Bloomberg Barclays U.S. Aggregate Bond Index; and cash is represented by Bloomberg Barclays U.S. 3-Month Treasury Bellwether Index.
Source: Vanguard calculations, using data from FactSet.


Consider these tips for weathering volatility

  • Stay diversified: A great way to insulate your portfolio is to have exposure to stocks, bonds, and international markets in an asset allocation plan that makes sense for your risk tolerance and goals. Bonds can provide stability during downturns. International exposure can give you access to markets that may be generating positive performance when others are falling.
  • Tune out the noise: There’s an old adage: “Never check your account when stocks are tanking.” It’s smart advice. As the graphics above show, making a decision based on a recent market event usually results in a mistake.
  • Control what you can—costs: Expenses eat into your returns. This is a particularly painful realization when stock markets are correcting.
  • Revisit your asset allocation: If market corrections are making you lose sleep, or if you’ll need your money soon, it may be time to consider less risky investments.
  • Set realistic expectations: Vanguard Investment Strategy Group anticipates higher risks and lower returns over the near- and medium-term.

Notes:

Please remember that all investments involve some risk. 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.

All investing is subject to risk, including the possible loss of the money you invest.