Economics and markets

Why to focus on long-term market results

April 13, 2023

Sharp or sustained market drops like we’re experiencing now can be hard to stomach. But investing in the stock market has been a prudent long-term strategy for many. Here are some tips for navigating downturns.

Bear markets and corrections are a part of life. Keep a long-term focus.

Since 1980, there have been 12 bear markets in global equities. But history has shown that equities typically post strong results over the long term.

A mountain chart shows that since 1980, there have been 12 bear markets, or market declines of 20% or more, in global equities. The starting dates for the first 11 were November 1980, August 1987, January 1990, July 1998, March 2000, March 2002, November 2007, May 2011, May 2015, January 2018, and February 2020. The bear market that began in January 2022 hasn’t ended, but past bear markets have recovered and produced strong results over the long term.

Note: Although the downturns that began in August 1987 (related to Black Monday) and February 2020 (related to the start of the COVID-19 pandemic) don’t meet a widely accepted definition of a bear market because they lasted less than two months, we are counting them as bear markets and including them in our analysis because of their historic nature. 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.

Sources: Vanguard calculations, as of December 31, 2022. MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI ACWI thereafter.

We don’t know precisely when a recession might start. But we do know they end.

Equity prices typically start to recover before recessions run their course.

A line chart shows the performance of the Standard & Poor’s 500 Index from 1973 through 2022, including its performance during seven recessions. Equity prices frequently begin to fall prior to the start of a recession and hit their lows during the recession. During the recession that began in November 1973 and ended in February 1975, the S&P 500 Index reached its low toward the end of the period, in September 1974. The next recession was much shorter, from January through June 1980. During this six-month period, the index reached its low in March, slightly earlier than in the previous recession. The recession that began in July 1981 lasted until October 1982. The low point of the S&P 500 Index occurred relatively late in the period, in July 1982. During the recession that began in July 1990 and extended through February 1991, the index hit its low in the middle of the period, in October 1990. For the recession that occurred from March through October 2001, the low occurred late in the period, in September. The next recession started in December 2007 and lasted through May 2009. The low for the S&P 500 Index during this period occurred near the end of the period, in February 2009. During the 2020 recession, which lasted only two months, the low occurred during the latter half of the period, in March.

Note: This chart shows the one-year annualized returns for the Standard & Poor’s 500 Index from 1973 through 2022. The shaded areas represent months where the U.S. economy was in recession as defined by the National Bureau of Economic Research. 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.

Sources: Vanguard calculations as of December 31, 2022, using data from Refinitiv.

Dramatic market losses can sting. Recoveries typically follow.

Bull market surges have been longer and stronger than the bear markets that preceded them.

A mountain chart shows that from January 1, 1980, through December 31, 2022, the average length of a bear market, or a market decline of 20% or, was 289 days, while the average length of a bull market was 997 days. The average return of a bear market was negative 29% and the average return of a bull market was 96%.

Note: Although the downturns that began in August 1987 (related to Black Monday) and February 2020 (related to the start of the COVID-19 pandemic) don’t meet a widely accepted definition of a bear market because they lasted less than two months, we are counting them as bear markets and including them in our analysis because of their historic nature. 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.

Sources: Vanguard calculations, as of December 31, 2022, using the MSCI World Index from January 1, 1980, through December 3, 1987, and the MSCI ACWI thereafter. Indexed to 100 as of December 31, 1979.

Timing the market is futile; the best and worst trading days often happen close together.
Line chart shows the daily returns of the Standard & Poor’s 500 Index from January 1, 1980, through December 31, 2022. The chart shows that the best and worst trading days often occur within days of each other. Ten of the 20 best trading days occurred during years with negative total returns, while 11 of the 20 worst trading days occurred in years with positive total returns.

Sources: Vanguard calculations as of December 31, 2022, based on data from Refinitiv using the Standard & Poor’s 500 Price 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.

Don’t panic during market turmoil.

Those who have overreacted to market events by moving to cash have seen their portfolios underperform the markets. Long periods out of the market make matters worse.

Illustration shows the return distribution of all-cash portfolios over 3-month, 6-month, and 12-month periods following 3-month periods in which equities declined 10% or more from January 1, 1980, through December 31, 2022. Investors have a 74% probability of underperforming the market, with an average underperformance of 4.1%, when they have moved their balanced 60% stock/40% bond portfolios into 100% cash for three months after a severe market event. Portfolio underperformance gets worse for those who convert their balanced portfolios to cash and hold it over longer periods of time. Converting a 60/40 portfolio to cash has led to a 71% probability of underperformance over a six-month period, with an average underperformance of 7.4%. Investors who have converted their 60/40 portfolio to cash and held it for 12 months have an 87% probability of underperforming, with an average underperformance of 13.5%.

Notes: Equities in the 60% equity/40% fixed income portfolio are represented by the Russell 3000 Index, and fixed income is represented by the Bloomberg U.S. Aggregate Bond Index. Cash is represented by the FTSE 3-Month Treasury Bill Index. Monthly data are from January 1980 through December 2022. Equity losses of more than 10% over three months trigger the move from a 60/40 portfolio to all cash in the illustration. 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.

Source: Vanguard total return calculations, as of December 31, 2022.

Balanced portfolios of stocks and bonds have proven resilient.

The longer you hold a balanced portfolio, the more likely you are to experience positive performance.

A bubble chart shows the percentage of time periods (1, 3, and 6 months and 1, 3, and 5 years) when both U.S. stocks and bonds experienced negative returns and when a 60% stock/40% bond portfolio experienced negative returns. While stocks and bonds have both experienced negative performance in the same month 15.3% of the time, over the same three-month period 9.3% of the time, and over the same six-month period 4.8% of the time, these two asset classes have both experienced negative total returns only 1.8% of the time over one-year periods. Since 1976, investors have never experienced a three- or five-year period during which both stocks and bonds produced losses. A similar pattern exists with a 60/40 portfolio, which has produced negative returns over a one-month period 33.7% of the time, over the same three-month period 25.7% of the time, and over the same six-month period 19.9% of the time. But over longer periods of time, a 60/40 portfolio has proven more resilient. Over one-year periods, it has produced negative returns 15.2% of the time. Over three- and five-year periods, it has produced negative returns just 8.1% and 0% of the time, respectively.

Notes: Data reflect rolling total returns for the periods shown and are based on underlying monthly total returns for the period from February 1976 through December 2022. The Standard & Poor's 500 Index and the Bloomberg U.S. Aggregate Bond Index were used as proxies for stocks and bonds, respectively. 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.

Source: Vanguard calculations, as of December 31, 2022.

What you can do when volatility hits:

Follow these simple steps to avoid overreacting to short-term downturns and to position yourself for long-term success.

This visual includes images of a headset, clock, wallet, line chart, and pie chart. The image of the headset reflects the need for investors to tune out the latest headlines and other noise. The image of the clock symbolizes the need for investors to revisit their asset allocations if they are particularly concerned about market corrections. The image of a wallet reflects the importance of controlling investment costs. The line chart symbolizes the importance of setting realistic expectations for your portfolio. Finally, the pie chart reflects the importance of holding a diversified portfolio.
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  • Our market volatility hub addresses current uncertainties and what this might mean for investors. Visit the hub.

Notes:

All investing is subject to risk, including the possible loss of principal. 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. Diversification does not ensure a profit or protect against a loss. 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. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.

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