Market volatility slide library 2020 updates 1
Geopolitical sell-offs are short-lived 5.3% Cuban President Nixon Iranian Soviet invasion 27% missile impeachment hostage Average total return of Afghanistan 26% 26% 6 months from event crisis proceedings crisis 1979 1962 1974 1979 9.8% 21% 6% Average total return 3% 1 year from event –3% –15% –16% –6% –4% –5% 1 year Key later Iraq War Arab Spring Ukraine Brexit vote 29% 2003 (Egypt) conflict 2016 6 months 2011 2014 later 18% 19% 14% 9% 9% 5% 5% Initial sell-off (length varies –3% –2% –1% –5% Notes: Not shown in the above charts, but included in the averages, are returns after the following events: the Suez crisis (1956), construction of the Berlin Wall (1961), assassination of President Kennedy (1963), authorization of military operations in Vietnam (1964), Israeli-Arab Six-Day War (1967), Israeli-Arab War/oil embargo (1973), Shah of Iran's exile (1979), invasion of Grenada (1983), U.S. bombing of Libya (1986), First Gulf War (1991), President Clinton impeachment proceedings (1998), Kosovo bombings (1999), multi-force intervention in Libya (2011), and the U.S. anti-ISIS intervention in Syria (2014). Sources: Vanguard calculations, using data from Thomson Reuters and FactSet. 2
Don’t let turbulence distract you: Keep your focus on the longer term Volatility and index prices for the S&P 500 7% 3,500 30-day average Intraday volatility S&P 500 Index 0% 0 1982 1988 1994 2000 2006 2012 2018 Note: Intraday volatility is calculated as the daily range of trading prices ([high-low]/opening price) for the S&P 500 Index. Sources: Vanguard calculations, using data from Thomson Reuters. 3
Longer holding periods reduce the chances of a negative return Historical probability of negative return 100% stocks 100% T-bills 60% stocks/40% bonds 50% Benefit of diversification: Real returns A 60/40 portfolio has 36% 40% less volatility than the 100% stocks portfolio 30% Understanding inflation risk: When adjusted for inflation, U.S. Real returns Treasury bills are more likely than 20% Real returns stocks to have negative returns 10% Nominal Nominal returns Nominal returns returns 0% 1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years Holding period in years Notes: Rolling return periods at quarter-end assuming yearly compounding. Nominal value is the value of anything expressed in money of the day, versus real value, which includes the effect of inflation. When determining which index to use and for what period, we selected the index that we deemed to be a fair representation of the characteristics of the referenced market, given the information currently available. For U.S. stock market returns, we use the Standard & Poor's 90 from 1926 through March 3, 1957, the Standard & Poor's 500 Index from March 4, 1957, through 1974, the Wilshire 5000 Index from 1975 through April 22, 2005, the MSCI US Broad Market Index from April 23, 2005, through June 2, 2013, and the CRSP US Total Market Index thereafter. For U.S. bond market returns, we use the Standard & Poor's High Grade Corporate Index from 1926 through 1968, the Citigroup High Grade Index from 1969 through 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 through 1975, the Bloomberg Barclays U.S. Aggregate Bond Index from 1976 through 2009, and the Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter. For U.S. cash reserve returns, we used the Ibbotson 1-Month Treasury Bill Index from 1926 through 1977, and the FTSE Three-Month Treasury Bill Index thereafter. Source: Vanguard Investment Strategy Group, as of December 31, 2019. 4
Downturns aren’t rare events: Typical investors, in all markets, will endure many of them during their lifetime Global stock prices Bear markets Bull markets 2,000 1,000 0 1979 1989 1999 2009 2019 One attention-grabbing 13 corrections 8 bear markets downturn every two years Decline of 10% or more Decline of 20% or more, at least two months long Sources: Vanguard analysis based on the MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI AC World Index thereafter. Both indexes are denominated in U.S. dollars. Our count of corrections excludes those that turn into a bear market. We count corrections that occur after a bear market has recovered from its trough even if stock prices haven’t yet reached their previous peak. 5
Timing the market is futile: The best and worst trading days happen close together S&P 500 Index daily returns 15% 10% 5% 0% Returns -5% -10% Thirteen of the 20 best Nine of the 20 worst -15% trading days occurred trading days occurred in years with negative in years with positive -20% annual returns annual returns -25% Source: Vanguard. 6
During recent major downturns, index funds remained net buyers Net new cash flows (in billions) into index funds during recent major downturns Tech bust bear market Global financial crisis bear market Peak to trough March 2000 to October 2002 Peak to trough October 2007 to March 2009 $172B $306B net flows net flows 14 60 12 50 10 40 8 30 6 20 4 10 2 0 0 -10 -2 -20 2000–03 2002–10 2007–10 2009–03 ETFs Mutual funds ETFs Mutual funds Notes: The two time periods are defined by the months in which the S&P 500 Index experienced price levels from peak to trough. Monthly flows are represented by funds denoted as index. Sources: Vanguard calculations, using data from Morningstar Inc. 7
Bear markets: A fact of life before (and after) the advent of indexing Great Arab oil embargo, Tech bust, Global Depression Watergate 9/11 terrorist financial attacks crisis 10,000x 1,000x (January 1, 1928 = 100) 16% 100x S&P 500 index value 10x Index fund asset percentage 100 1976 Vanguard launches what became the 500 Index Fund, the first index fund for individual investors 0.1x 1927 1937 1947 1957 1967 1977 1987 1997 2007 2017 Bear markets Index fund assets, as a percentage of U.S. market capitalization S&P 500 Index Notes: S&P 500 Index value reflects the growth of the S&P 500 Index (total return) from January 1, 1928, to December 31, 2019, based at an original value of 100, and is presented in logarithmic scale. Index fund asset percentage is defined as the percentage of assets in U.S.-domiciled U.S. equity index funds divided by market capitalization of the Russell 3000 Index. Bear markets are defined by Yardeni Research Inc. Vanguard Marketing Corporation, Distributor. Sources: Vanguard, using data from Morningstar Inc. and Yardeni Research Inc. 8
Expected long term returns rise with higher stock allocations, but so does short-term risk Range of 60% calendar-year returns, 30 1926–2019 Each circle 0 represents one year of returns (94 circles per –30 allocation) –60 100% 90%/ 80%/ 70%/ 60%/ 50% 40%/ 30%/ 20%/ 10%/ 100% bonds 10% 20% 30% 40% bonds/ 60% 70% 80% 90% stocks 50% stocks Notes: Stocks are represented by the Standard & Poor’s 90 Index from 1926 through March 3, 1957; the S&P 500 Index from March 4, 1957, through 1974; the Wilshire 5000 Index from 1975 through April 22, 2005;the MSCI US Broad Market Index from April 23, 2005, through June 2, 2013; and the CRSP US Total Market Index thereafter. Bonds are represented by the S&P High Grade Corporate Index from 1926 through 1968;the Citigroup High Grade Index from 1969 through 1972; the Bloomberg Barclays U.S. Long Credit AA Index from 1973 through 1975; and the Bloomberg Barclays U.S. Aggregate Bond Index thereafter.Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Source: Vanguard Investment Strategy Group. Data as December 31, 2019. 9
Volatility: More the rule than the exception Number of days in the previous 30 trading days where stocks fell or rose 1% or more Example: February 25, 2016 30 19 of the previous 30 trading days had stock movements 25 of 1% or more 20 15 10 5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Sources: Vanguard calculations based on S&P 500 data from Thomson Reuters. Data are from December 31, 1999, through December 31, 2019. 10
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