Investors may be running for the hills thanks to the steep declines in stocks this week, but Vanguard is urging investors to stay diversified and ignore the noise, as pullbacks are more common than investors may think.
According to a Vanguard blog post, research from its Vanguard Investment Strategy Group shows that, since 1980, a market correction or bear market has occurred roughly every two years. Vanguard said that, since 1980, there were 11 corrections in which stocks declined 10% or more and eight bear markets in which declines of 20% or more lasted for more than two months.
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As a result, investors are likely to live through many of these pullbacks and corrections during their lifetime and will end up making costly mistakes if they try to base investment decisions to insulate from the declines. Take timing the market as one example. Investors engaging in this strategy typically end up locking in losses. What's more, Vanguard said that timing the market is difficult to do given the best and worst trading days tend to occur close to each other. According to Vanguard research, 12 of the 20 best trading days happened in years when annual returns were negative. What's more, nine of the 20 worst trading days occurred in years when stocks logged positive annual results.
To illustrate this point further, the fund manager found that, if you had invested $1,000 on Oct. 8, 2007, prior to the financial crisis peak, and sat tight with an allocation of 60% stocks and 40% bonds, that investment would have increased to $1,967 as of Feb. 5, 2018. Investors who moved to cash ended up with a balance of $915, lower than what they started with. Those who shifted to bonds saw their investment increase to $1,259.
Given the research, Vanguard said that investors can ride out the current drop in stocks by staying diversified, having exposure to stocks, bonds and international markets. "Bonds can provide stability during downturns. International exposure can give you access to markets that may be generating positive performance when others are falling," Vanguard wrote. It is also advising investors to tune out the noise, following that old adage that you should never check your investment account when stocks are falling. "Making a decision based on a recent market event usually results in a mistake," the fund company said.