Shop our products
,

Market Corrections

How to cope with a market corrections
By Vanguard

Since May 19 the stock market has dropped about 10%. A 10% drop in the value of your own stock holdings can be emotionally unsettling. So what should you do, if anything?

 

There is good evidence that in turbulent market times, doing nothing eventually pays off.

market correctionIn 2009, after the stock market had lost half its value, 87% of Vanguard retirement plan participants didn’t touch their accounts. In fact, between September 2007 and December 2009 only 3% of participants in Vanguard retirement plans gave up on stocks completely.

As a result, between the end of 2008 and the end of 2013 the average Vanguard 401(k) portfolio almost doubled in value, from $56,030 to $101,650. Much of the gain can be attributed to the rebound in stock prices following the end of the recession.*

To put it another way: Investors who ignored the market’s volatility didn’t just recover; they gave their portfolios a chance to realize additional gains.

But supposing you just can’t tolerate a sharp downturn?

In a recent interview with Vanguard, Burton G. Malkiel, a highly respected Princeton University economics professor and author of A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, said: “You want a mix of stocks and bonds that allows you to sleep at night. . . . The combination of stocks and bonds in your portfolio has to be geared to your psychological makeup.”

You can take a step toward sounder sleep during volatile markets with help from Vanguard’s Investor Questionnaire. This short, one-page survey asks you what you would do with your investments in response to various possible market scenarios. Using your responses, the questionnaire will suggest a mix of stocks and bonds that is compatible with your tolerance for risk.

As the market goes through its gyrations, it may also help if you keep in mind your time horizon—how long it will be before you need to start withdrawing money from your portfolio to finance your retirement.

If you are decades away from retirement, your portfolio has time to recover from this market correction and others that are likely to come along.

Even if you’re close to the end of your career, keep in mind that your portfolio is likely to be working for you through what could well be a long retirement. During those years, too, stocks will be subject to downturns—and recoveries.

Notes:

This article is for educational purposes only. Vanguard recommends you consult a professional regarding your personal situation.

All investing is subject to risk, including the loss of the money you invest. Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.