A dose of perspective to help you navigate clients through moments that matter

Spikes in market volatility and equity drawdowns are understandably unsettling to your clients. These are the times when your proactive engagement and communication as a trusted advisor can further build trust and strengthen the relationship. As such, we here at Vanguard hope the following is helpful in your client conversations, in these moments that matter.

Putting recent volatility into a broader focus, it is worth pointing out that we are not outside the realm of “business as usual.” Based on the close of the S&P 500 as of Monday, August 5th, the U.S. bellwether index is only down 8.5% from its July 16 high. As Figure 1 shows, historically, drawdowns of that magnitude are very much par for the course, with a median intra-year maximum drawdown of 10% since 1985.

Figure 1: S&P 500 annual return and maximum intra-year drawdown

Source: Vanguard Investment Advisory Research Center calculations using data from Morningstar, Inc.

Data through August 5, 2024.

Past performance is not a 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.

For additional perspective, through August 5, 2024, the U.S. market¹ is still up 8.3% year-to-date, 16.2% over the trailing 12 months, and 5.3% over the past 36 months. Similarly, a balanced, 60/40 stock and bond portfolio² is currently up 4.4% year-to-date, and 10.3%, and 1.3% over the past 12 and 36 months, respectively. For balanced investors, the fixed-income allocation of their portfolio is serving its purpose as ballast very well. So, unless an investor was a lump-sum investor and had put most of their money in the markets for the first time over the past few weeks, it has been a great time to be invested! Your clients may be tempted to “do something” after a particularly negative trading day, but it is also worth reminding them that the best and worst days tend to cluster together, and the impact of missing one of the best days could be a significant setback to their long-term plans, as well as to your advisory practice.

You will likely hear all kinds of attribution on “why” or what single or several factors caused this recent bout of volatility, and it can be tempting to latch on to a compelling narrative. But we encourage you to be careful, thoughtful, and humble when discussing causation as the reality is likely as much emotional as statistical and the result of hundreds of variables, many unknown, that cascade into the effect versus any one or few potential culprits. If you look hard enough, there’s always a potential reason for markets to be volatile, yet they are more often than not positive.

Figure 2: The rewards of staying the course through market drawdowns

Source: Vanguard calculations as of June 30, 2024.

Notes: Portfolio is representative of a 60/40 stock and bond portfolio. The equity portion of the 60% stock, 40% bond portfolio consists of CRSP US Total Market Index. The bond portion consists of the Bloomberg U.S. Aggregate Float Adjusted Index. Cash represented by the FTSE 3 Month US Treasury Bill Index. "Staying invested" refers to keeping all assets in the 60/40 stock/bond portfolio and rebalancing monthly.

Past performance is not a 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.

We don’t know what the future will bring nor can we control the markets, but we do know that patience has been richly rewarded historically as shown in Figure 2 and we can help our clients control their emotions. This is behavioral coaching weather and a time where advisors are likely to earn most of their fees. Perhaps even a lifetime of fees earned in one short coaching conversation. The key is to persist while others quit. This is the time to leverage the trust you have earned through years of relationship-building, act with empathy and understanding, and help your clients keep their financial dreams intact. We have the resources and insights to help you coach your clients through these moments that matter.

1 U.S. market represented by CRSP US Total Market Index.

2 Within 60/40 stock and bond portfolio, the 60% equity portion is represented by the CRSP US Total Market Index while the 40% bond portion is represented by the Bloomberg U.S. Aggregate Float Adjusted Index. Cash is represented by the FTSE 3 Month US Treasury Bill Index.

Notes:

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.

Investments in bonds are subject to credit, interest rate, and inflation 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.

Past performance is not a guarantee of future returns.