by Tim Buckley
Vanguard chief investment officer
I read a quip in the local paper over the weekend: The stock market takes the stairs up but the elevator down. As I felt the elevator begin its descent this week, my stomach lurched a bit, but I kept coming back to the fact that good investing requires discipline and a bit of courage. You need discipline to stick with a well-established long-term investment plan and courage to endure short-term volatility.
The correction in the stock markets worldwide over the past few weeks is understandably disconcerting. Investors are wondering what happened and what’s next for global markets.
First, some perspective.
• Market corrections are not unusual. On average, equity markets experience a correction, defined as a drop of 10 percent or more, every 18 months. It’s been nearly four years since the market entered correction territory in October 2011. Even with this context, it’s difficult to stomach sharp drops in the market. I urge investors to look more broadly and consider the recent dip against a backdrop of a long period of steady market gains. Over the past month, the S&P 500 Index dropped about 10 percent, albeit gaining back some ground recently. By contrast, the index has risen more than 200% since March of 2009. This week’s events, although unpredictable, are part of the broader cycle of market ups and downs.
• Multiple factors contributed to recent volatility. Many headlines point to China as the cause of this week’s equity sell-off around the world. Yes, fear of weaker growth in China and the recent devaluation of the yuan certainly contributed to the volatility in the global markets, but those aren’t the only reasons. Global growth expectations beyond China remain tempered, commodity prices are falling, and no one knows for sure when the Federal Reserve will raise interest rates. These economic challenges have been around for some time, and we expect they’ll continue to create periods of volatility in the future.
• The U.S. economy remains resilient. Despite global headwinds, economic indicators such as employment, housing statistics, and consumer confidence continue to show healthy gains. Escalating volatility may impact the timing of a decision by the Federal Reserve to raise interest rates, but we believe a 2015 rise is still likely.
Second, some patience. This is the challenging part of investing. It’s tough to sit tight and stay calm when we live in a world of 24-hour news cycles amplified through social media and smartphone alerts. “Tuning out the noise” is difficult when the noise is seemingly everywhere.
No one can predict what’s next for global markets. That’s why today’s chatter about what the market is doing or might do is meaningless, and potentially dangerous, for the long-term investor.
Instead, focus on what you can control: your goals, asset allocation, costs, and discipline to stick to your plan. These are the four principles that drive investment success. They are easy to recite, but can be harder to sustain, especially in times of uncertainty. Investors who can adhere to these four principles, while keeping some perspective and patience, will be well positioned to weather any market.