Model portfolios can help your clients stay focused on long-term goals
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Model portfolios can help your clients stay focused on long-term goals

Vanguard Perspective

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June 20, 2023

When the financial markets are in turmoil and account balances start to fall, there can be a strong temptation to “do something” to stem any perceived losses. Yet it is often the case that staying the course proves to be the better path.

Most pre-retirees have lived through their share of market turmoil already. Since 1980, there have been 10 bear markets and six recessions.1 Figure 1 illustrates the ups and downs of the S&P 500 Index during this period.

A line chart depicts the 30-day average intraday volatility from January 1, 1980, to December 31, 2022. The market events noted in the chart are black Monday in 1987, the tech boom/bust in 200-2001, the global financial crisis in 2008-2009, and the global coronavirus pandemic in 2020. A shaded area depicts the S&P 500 Index closes from January 1, 1980, to December 31, 2022. Intraday volatility is calculated as the daily average of trading prices [(high-low)/opening price] for the S&P 500 Index. The source is Vanguard calculations, using FactSet.

 

Sources: Vanguard calculations, using data from FactSet.

Notes: Intraday volatility is calculated as the daily range of trading prices [(high-low)/opening price] for the S&P 500 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.

Despite experiencing these rollercoasters, clients can feel unsettled by short-term declines. Sudden or sustained down-turns in the market can make them fear their future goals are in jeopardy and question their ability to retire the way they want. To help clients realize the importance of sticking to their investment strategy, they need to understand that a period of recovery often follows market declines. Selling stocks to avoid further loss risks their ability to participate in a period of growth that historically comes next.

For example, during the global financial crisis of 2008–2009, the S&P 500 Index dropped a devastating 48% in a little over six months. However, the longest stock market recovery in U.S. history followed.2

Figure 2 compares the value of a $1,000 investment made at market bottom and invested in a portfolio of 50% stocks and 50% bonds, to an investment in 100% bonds and one in 100% cash. As you can see, investors who maintained some stock allocation faired significantly better than those who changed their strategy and abandoned stocks, missing the lucrative recovery.

A line chart depicts the value of a hypothetical $1,000 investment of 50% stocks and 50% bonds between October 9, 2007 and December 31, 2022. If the investment were converted to cash at the market trough of the global financial crisis on March 9, 2009, it would have ended 2022 down 2% from its pre-crisis peak. Had it been converted to a 100% bond portfolio, it would have ended 2022 up 2% from the pre-crisis peak. And had the investment been left as a 50% stock and 50% bond portfolio, it would have ended 2022 up 149% from its 2007 pre-crisis peak. The 50% stock/50% bond portfolio is represented by the Standard & Poor’s 500 Index and the Bloomberg U.S. Aggregate Bond Index (rebalanced monthly). The 100% bond portfolio is represented by the Bloomberg U.S. Aggregate Bond Index. The 100% cash portfolio is represented by 3-month Treasury bills.

Sources: Vanguard calculations, using data fromm FactSet. All data as of December 31, 2022.

Notes: This is a hypothetical illustration. The balanced portfolio is represented by 50% S&P 500 Index and 50% Bloomberg U.S. Aggregated Bond Index; bonds are represented by Bloomberg U.S Aggregate Bond Index; and cash is represented by 3-month Treasury bills. Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

How to keep clients on track

As a financial advisor, saving clients from making decisions based on fear can be one of your greatest challenges. Here are a few ways you can keep them on track.

Help clients take the long view

Make sure your clients understand the benefits of staying on plan. A strategic asset allocation can help clients focus on the long view of investing. Figure 3 shows a recent example of how staying the course prevailed over jumping ship: A hypothetical 60% stock/40% bond portfolio that stood at $1 million on January 1, 2020, would have lost about 20% of its value by March 23—when the stock market bottomed out from the coronavirus pandemic. Yet converting the portfolio to cash at that time would have cost an investor more than $340,000 over the next 26 months versus the alternative of staying invested.

A line chart shows the value of a hypothetical $1 million global portfolio invested 60% in stocks and 40% in bonds from early 2020 through May 2022. If sold for cash on March 23, 2020 (when markets plummeted in response to the COVID-19 pandemic) and not reinvested, the investment would have been worth about $800,000 in May 2022. If sold for cash on March 23, 2020 and reinvested in the same portfolio August 4, the portfolio would have been worth less than $900,000 in May 2022. And if the portfolio had been untouched through the March downturn, it would have experienced a significant gain, to about $1.1 million, in May 2022. The two most significant takeaways from the chart are that markets can turn around quickly, and therefore, staying invested through market turbulence can be an effective long-term strategy.

Sources: Vanguard calculations, based on FactSet, as of May 31, 2022.

Notes: U.S. stocks represented by CRSP US Total Market Index. U.S. bonds represented by Bloomberg U.S. Aggregate Float Adjusted Index. Global stocks represented by FTSE Global All Cap ex US Index. Global bonds represented by Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. Cash represented by FTSE 3-Month U.S. Treasury Bill Index. Stock allocation consists of 60% U.S., 40% international. Bond allocation consists of 70% U.S., 30% international. Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Deliver a plan they can stick to

Downturns come and go. The results of a well-designed and faithfully followed plan can serve clients for their lifetimes. Vanguard model portfolios can be a good place to start. Vanguard models take advantage of broad, global exposure, over time, with oversight. You know that your value as an advisor includes behavioral coaching and helping to keep your clients on target. Vanguard mirrors that by managing these portfolios with a research-driven plan and not reacting emotionally to turbulent markets.

Please don't hesitate to contact your Vanguard Financial Advisor Services™ sales team at 800-997-2798.

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1 Sources: Vanguard. Number of bear markets based on MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI AC World Index (price return) from January 1, 1988, through December 31, 2022. Number of recessions based on the National Bureau of Economic Research’s US Business Cycle Expansions and Contractions data.

2 Luwq Wang, 2019. “The Bull Market Almost No One Saw Coming,” Bloomberg Businessweek, December 15, 2019, https://www.bloomberg.com/news/articles/2019-12-15/the-bull-market-almost-no-one-saw-coming, accessed on December 19, 2019.

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