When market volatility surges

Our experts look at what investors should do when market volatility surges.


Global macro matters

Lara DeLaIglesia

Lara de la Iglesia: All right, guys, let’s talk about investors who might be a little bit rattled by the recent events in the stock market. Now we can’t say for certain if stocks are going to go up or continue to decline, but if they continue to decline, is there anything that investors should be doing to position themselves for that?

Harshdeep Ahluwalia: First off, you’re absolutely right. We can’t say with any certainty whether the stock market will continue to rally or will falter in the short term. What investors should remember is that they need to separate between short-term market-timing calls and these long-term return expectations that we provide.

Essentially, the latter can be used to set realistic expectations for investors and help them plan. They can plan in terms of saving and spending decisions, in terms of their investment goals, whether they’re reasonable or not, and finally they can recalibrate if they’re taking on the right amount of risk or not.

Lara de la Iglesia: Okay. So what is our possible range of outcomes then for the markets right now?

Harshdeep Aluwalia
Harshdeep Aluwalia

Harshdeep Ahluwalia: So given the elevated valuations in the U.S. equity market, we believe that the expected returns are not going to be as high as in the last few years. So as far as the U.S. market goes, we expect returns in the 3.5 to 5% range over the next decade.

The case for global equities, we expect returns in the 4.5 to 6.5% range, which is a little bit higher than what we could expect in the U.S. equity. So it highlights the case of global diversification.

Lara de la Iglesia: Yeah, for sure.

Roger Aliaga-Diaz
Roger Aliaga-Diaz

Roger Aliaga-Díaz: Absolutely. Yeah, following on that, global diversification is one of the things that investors can control. And as Harsh points out, with a different outlook and valuation, there is always some market that is doing better than others, so global equity diversification is important.

As it is, diversification and fixed income into bonds, we’ve been in some market volatility there too on the fixed income side and interest rates; but over the medium term to the long term, we do expect the natural diversification between stocks and bonds to persist, to continue.

So, basically, controlling cost, controlling saving decisions, rebalancing the portfolio often, and staying diversified are the things that investors should really be focusing on during periods of high volatility. That perhaps is the best way to withstand any period of market uncertainty.

Lara de la Iglesia: Okay, great, well that sounds like a good point to leave it at there. Thank you guys very much.

Roger Aliaga-Díaz: Thanks very much.

Harshdeep Ahluwalia: Thank you.

Important information

Diversification does not ensure a profit or protect against a loss.

All investing is subject to risk, including possible loss of principal.

Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.

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IMPORTANT: The projections or other information generated by Vanguard’s fair-value CAPE ratio regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

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