Updated: Dec 7, 2020
It’s worth putting the market downturn stemming from Covid-19 into context.
SINCE 1980 THERE HAVE BEEN:
12 Market Corrections, with market declines of 10% or more
8 Bear markets, with declines of 20% or more, lasting at least two months long
5 Recessions, with declines in economic conditions for two or more successive quarters
It’s important to realize that downturns are not rare events: Typical investors, in all markets, endure many of them during their lifetimes.
Even knowing this, it can be unsettling to witness the decline of your portfolio during one of these events. After all, that account balance is more than a number — it represents very important personal goals, such as the ability to retire comfortably or to provide a quality education for family members. When market conditions place those goals in jeopardy, you may feel compelled to do something, such as sell most or all of your investments. You may assume that converting to cash will give you a better long-term result than staying invested.
But such action would shut you out of the strong recoveries that have historically followed market downturns. The answer is to come up with a game plan before the next market pullback, so you’re well-positioned to try to take advantage of the opportunities that follow. What’s more, you’ll probably know what to expect as markets cycle through their phases, so you can tune out messages that don’t help your strategy.
It’s worth noting that not all financial declines are the same in length or severity—for example, historically speaking, the global financial crisis and Great Recession of 2008– 2009 was an extreme anomaly. As challenging as that event was, it was followed by the longest stock market recovery in U.S. history.
RIDING OUT A ROUGH PERIOD
Sources: Vanguard calculations, using data from FactSet. All data as of June 28, 2019.
BEST DEFENSE: MAKE A PLAN AND STICK TO IT
Remember that bearish market conditions — while inevitable — don’t last forever. As a savvy investor, you can ignore short-term pullbacks of the market (and any commentary that might cause you to veer off course) and remain committed to achieving your long-term vision.
Downturns come and go. The results of a well-designed and faithfully followed plan, on the other hand, can serve you the rest of your life. (Source: Vanguard)