Knowing what not to do during a market downturn is only half the battle. What should investors do? Our recommendation has not changed – and it will not change, regardless of market behavior.

be ready

First, each investor must:

formulate or review investment objectives to ensure they are appropriate;

develop a suitable asset allocation using widely dispersed funds;

control costs; and

Maintain a long-term vision and discipline.

The first three steps are integral to developing a good investment plan. The fourth step is necessary to realize the potential long-term benefits of the program. Vanguard’s Principles for Successful Investing detail the 4 steps. For our research on these and other questions, see Vanguard’s Framework for Building Globally Diversified Portfolios.

rebalance

We also believe that you should adjust your holdings from time to time to match your target asset allocation.

Returning to the target mix or rebalancing, as simple as it may seem, often proves to be psychologically difficult. In effect, it forces you to sell assets that work better for you and buy those that don’t.

If the market goes down, rebalancing may require investing in assets that have lost value. “It’s counterintuitive,” said Stephen Utkus, head of investor research at Vanguard, “but it’s an economically sound course of action to stay the course or buy more assets that are falling.” .

be patient

Investing is a long-term proposition that is best suited for pursuing long-term goals. Vanguard expects only modest growth over the 10-year period beginning in the fourth quarter of 2019. For example, we expect a globally diversified portfolio of 60% equities and 40% bonds generates annualized returns of around 3.5% to 6.3%. 1 (See our 2020 Economic and Financial Markets Outlook, A New Era of Uncertainty for more details.) Despite the “increased risk” of a sharp stock market downturn ahead, our investment strategists expect long term gains. But you need to stay invested, even in tough times, to maximize your chances of capturing the market’s long-term growth potential.