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Portfolio > Portfolio Construction > Investment Strategies

Vanguard CIO Warns Investors Against Market Timing

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What You Need to Know

  • Missing just a few rally days over decades could have a huge impact, Greg Davis writes.
  • Vanguard expects a mild U.S. recession within two years, which the market already may have priced in, he said.
  • Balanced portfolios aren't over, and bonds are a stabilizing portfolio force in the long run, he noted.

Vanguard’s chief investment officer recommends a steady, well-diversified investment approach, even as stocks continue to slide amid rising interest rates, recession fears and high inflation.

Trying to forecast a stock market bottom is always difficult and investors, including professional money managers, are unlikely to come out ahead trying to time the market, Vanguard CIO Greg Davis said in a post Monday.

“Not only do you have to be right on when to get out of the market, you have to be right on when to get back in. Successfully timing the stock market is near impossible, partly because the best trading days tend to cluster around the worst ones,” Davis wrote.

Trying to time investments by leaving a down market could mean missing key rallies and a much higher return, he suggested.

Davis’ commentary appeared as the market reeled Monday, with the S&P 500 reaching a new 2022 low. Bloomberg noted stocks were in free fall as bearish sentiment persisted amid rising global interest rate hikes.

The advice for clients to stay the course even in volatile markets is hardly new, although investors are bombarded daily with expert commentary suggesting they buy or sell various securities. (Vanguard’s late founder, John C. Bogle, used “stay the course” in the title of his 2018 book about the mutual fund giant’s history.)

Just this week, BlackRock has urged investors to “shun most stocks” in the short term and Goldman Sachs went underweight on equities in its global allocation for the next three months.

Vanguard’s Davis laid out the risks associated with market timing and the potential rewards for maintaining a regular investing strategy. Moreover, he advised younger investors that the current market climate can be especially appealing for them and said equities markets were “near fair value.”

Timing Risk: Missing Key Rallies

A look at S&P 500 daily price returns from 1980 through 2021 shows that nine of the 20 best trading days came in years with negative total returns, while 11 of the 20 worst trading days occurred in years with positive returns, the CIO said, citing data from Refinitiv.

“Missing just a few of those rally days has a surprisingly outsized impact,” Davis wrote. “Looking at market data going back much further, to 1928, being out of the stock market for just the best 30 trading days would have resulted in half the return over that period. It pays to remain invested and balanced precisely when it is most difficult to do so.”

While Vanguard expects a mild U.S. recession in the next 24 months — it recently predicted a 65% recession likelihood for the next two years — financial markets may already have accounted for that development, he said.

“None of this negates the benefits of staying the course with an investment approach focused on low cost, balance, and diversification,” he added.

Davis doesn’t seem to make an exception for sitting on the sidelines to wait out the Federal Reserve’s current rate-hike cycle.

“Over the long run, maintaining a steady, strategic approach has proven itself time and again — through periods of high inflation, low inflation, bull markets, bear markets, and a variety of business cycles,” he said.

“That said, trepidation is only human during periods of volatility like this. And each individual is unique in their circumstances, finances, time horizons, and risk temperaments.”

He recommended investors consider consulting an advisor who has a fiduciary duty to look after their interests, whether they establish an ongoing relationship, engage in a one-off session or turn to digital advisors.

Don’t Count Balanced Portfolios Out

Davis also called it premature to proclaim the end of the “traditional balanced portfolio.”

While the diversification benefits of bonds have waned this year as the correlation between fixed income and equities rose, this has happened before, he said. More often, and in the long term, bonds are a stabilizing force in portfolios during stock market volatility, and also provide an income benefit, he noted.

“Given the rise in interest rates, our expected returns for bonds over the next decade have increased by almost 2% since September 2021,” Davis wrote. “Holding bonds makes even more sense now, and they still play an important role in a well-diversified portfolio.”

As for younger investors, the market now appears particularly favorable, he added.

“With the recent sell-off, equity markets are now near fair value. In the fixed income markets, while rising interest rates cause near-term pain for investors, higher rates have raised return expectations,” Davis said.

“If you’re still in the accumulation phase of your investment life, you want to be buying at cheaper prices. Which is why, when the markets get challenging, like they are now, it’s essential that investors stay focused on their long-term goals and not get obsessed with their account balance today.”

Citing the advantages of compound returns, and recommending broad diversification via low-cost mutual funds and ETFs, Davis wrote, “the cumulative impact of little incremental gains over time is astounding. But you won’t get that compounding if you’re not invested.”


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