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Vanguard - Staying calm during a bear market
 

Staying calm during a bear market

One of the risks you face as an investor is that financial markets lose value suddenly and significantly.

Sometimes they bounce right back. Other times the downturn is lengthy.

If history is any guide, prolonged downturns of 20% or more can be expected twice a decade. Known as “bear markets,” these episodes can test any investor’s staying power.

What is a bear market?

While there’s no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period. By this measure, there have been ten previous bear markets in stocks during the last half-century.

The last ten bear markets

Period

Duration (in Months)

Percentage Drop

August 1956-October 1957

14.7

-21.6%

December 1961-June 1962

6.4

-28.0%

February 1966-October 1966

7.9

-22.2%

November 1968-May 1970

17.9

-36.1%

January 1973-October 1974

20.7

-48.2%

September 1976-March 1978

17.5

-19.4%

January 1981-August 1982

19.2

-25.8%

August 1987-December 1987

3.3

-33.5%

July 1990-October 1990

2.9

-19.9%

March 2000-October 2002

30.5

-49.1%

Source: Standard & Poor’s Corporation.

Bear markets can hurt

Bear markets get the best of investors everywhere. It’s extremely difficult to see one coming—or to get out of the way.

Your account can lose significant value. Downbeat news coverage can add to the uncertainty. Friends, family, or coworkers may urge you to make changes in your holdings.

It may feel as though the market has singled you out for punishment. But that’s not the case. You may be better-served by adhering to your long-term investment plan.

Stay the course

Although there are no certainties, the market’s ups and downs tend to even out over the long run into a steady upward trend. That’s why Vanguard advises investors to “stay the course” by remaining true to their long-term plans.

The foundation of a sound investment plan is to own a mix of investments that reflects your goal, time horizon, and risk tolerance.

Having the right mix

Here are three questions to consider as you evaluate your investment mix:

  • What are you saving for? If you have a long-term goal, stocks offer a greater chance to grow your money than do bonds or money market funds.
  • How long do you have until you’ll need your money? If your answer is ten years or longer, you likely have sufficient time to recover from a market setback.
  • How do you handle investment losses? Don’t lie awake nights fretting about paper losses. Remember that playing it safe has its own danger: You run the risk of losing purchasing power to inflation.

Complete the Investor Questionnaire to find which investment mix might be appropriate for you. Here’s how some suggested investment mixes have fared over time, including how often they’ve recorded down years before:

Model portfolios: 1926-2007*

Your Asset Allocation

 

Average Annual Return

Years With

a Loss

Average Loss

100% bonds

5.5%

13 of 82

-3.1%

20% stocks

80% bonds

6.8%

11 of 82

-4.0%

30% stocks

70% bonds

7.4%

13 of 82

-4.7%

40% stocks

60% bonds

7.9%

15 of 82

-5.5%

50% stocks

50% bonds

8.4%

16 of 82

-6.8%

60% stocks

40% bonds

8.9%

20 of 82

-7.1%

70% stocks

30% bonds

9.3%

21 of 82

-8.5%

80% stocks

20% bonds

9.7%

22 of 82

-9.8%

100% stocks

 

10.4%

24 of 82

-12.2%

*The performance data shown represents past performance, which is not a guarantee of future results. Stocks: Standard & Poor’s 500 Index from 1926 to 1970, Dow Jones Wilshire 5000 Index from 1971 through April 22, 2005, MSCI US Broad Market Index thereafter. Bonds: Standard & Poor’s High Grade Corporate Index from 1926 to 1968, Citigroup High Grade Index from 1969 to 1972, Lehman Long-Term AA Corporate Index from 1973 to 1975, Lehman Aggregate Bond Index thereafter.

Source: The Vanguard Group

Bear market survival tips to consider:

  • Focus on achieving your financial objectives, rather than short-term market performance.
  • Continue to invest. Make regular contributions through your employer’s plan. Stocks may be a good value after a sharp drop.
  • Don’t make sudden moves. If you must shift investments, do so gradually. Don’t move more than 10% of your money in any one exchange. A market recovery can be just as sudden as a drop.
  • Be patient. Many recent rebounds have been rapid, but it has sometimes taken five years or longer to recover from a bear market.

For more information

If you have questions about your employer’s retirement savings plan, call Vanguard® Participant Services at 800-523-1188.

Vanguard is one of the world’s largest investment management companies, serving individual investors, institutions, employer-sponsored retirement plans, and financial professionals. We offer investors an exceptional value through a dedication to outstanding performance, superior service, and low costs.

We recommend that you consult a tax or financial advisor about your individual situation.

For more information about any fund, including investment objectives, risks, charges, and expenses, call The Vanguard Group at 800-523-1188 to obtain a prospectus. The prospectus contains this and other important information about the fund. Read and consider the prospectus information carefully before you invest. You can also download Vanguard fund prospectuses at www.vanguard.com.

All investing is subject to risk. Investments in bond funds are subject to interest rate, credit, and inflation risk.

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