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

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.

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.

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.

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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