Now that 2016 is here, with it has come even more market volatility than we saw last year. There have been wide swings and slumping stock indexes in just the first weeks of January, as investors trade on fears of diminishing growth in China, and as oil prices keep sinking. That’s when I think of this quote from famed investor Warren Buffett: “Be fearful when others are greedy, and greedy when others are fearful.”

Or, as Vanguard Founder John C. Bogle put it, “Don’t do something—just stand there!”


Given the market volatility over the last year, and its acceleration so far this year, it’s natural to react emotionally. For example, many have been concerned about the slowdown in China’s growth engine, fearing a hard landing for their economy. The Chinese government wants to engineer a soft landing—such as moving from a producer-based to a consumer-based economy, reducing excess capacity, and balancing pace with quality of growth—but there’s skepticism that a perfect landing can be engineered. The skepticism has led some to panic and selling—while others see it as a buying opportunity.

It’s important to keep perspective so consider this: In 2007, before the global financial crisis, China’s economy was growing at close to 14%. Even if there hadn’t been a financial crisis, how realistic was it for China to continue at that torrid pace? Just as a point of comparison, if China had grown by 14% for 10 additional years, that would have meant China’s economy would have increased 270% by 2017. (You can learn more about our perspectives on China’s economic situation by reading China: What does Vanguard think? and Vanguard’s 2016 economic and investment outlook.)

The precipitous drop in oil prices lately also seems to be a harbinger of doom. During the last financial crisis, most of the decline in oil prices was driven by a strong decline in demand. This time, a good part of the price drop is a result of oversupply, partly from more efficient extraction technology, and partly as a result of some producers pumping additional oil to capture market share. Also, because oil is priced in U.S. dollars, the strengthening of the dollar has weighed on oil prices—although to a lesser extent recently as appreciation of the dollar has slowed.

Usually, a drop in the price of oil is considered beneficial to the world’s economy. However, as oil prices continued their sharp decline in 2015 and early 2016, the effect has been unnerving. For example, the Dow Jones Industrial Average fell 391 points on January 15, in large part from the trigger of oil dipping below $30 a barrel, a price that may have been psychologically important.

It’s tempting to be tactical

Whenever there’s extreme volatility and a market correction, it can feel abnormal—like it never happened before, or, if it did, it must be very different this time. However, the markets are, by nature, cyclical. U.S stocks have experienced annual losses in 25 of the last 89 calendar years—that’s 28% or almost one-third of that period.1 Nonetheless, when it happens, we’re tempted to question our asset allocation strategy. We want to be just a bit more “tactical” (i.e., time the markets) or “defensive” (i.e., time the markets).

Intellectually, we know that exiting markets during downturns is counterproductive. But action always seems better than inaction. We rationalize it by thinking we can always get back in after the markets have settled down—which, in some investors’ minds, means after the markets have gone back up.

However, our research suggests that market-timing on average may cost investors 1%–2% per year compared with what they could have earned if they just “stood there and did nothing.”2 Professionals attempting market-timing have fared no better than retail investors, as shown in numerous academic studies.

The bear market of 2007–2009, one of the worst in history, offers a good example of how it can be tempting to make market-timing moves. Near the end of that cycle, many investors were despairing, and concluded that things were only going to get worse. Even among Vanguard Institutional Advisory Services’® sophisticated clients, there were a handful who were starting to think of cash as a safe haven (fortunately, the vast majority didn’t pull the trigger). Let’s look at a hypothetical scenario that seemed appealing to some of our clients in March 2009—the depths of the bear market.

This example uses a typical endowment portfolio allocation of 70% stocks and 30% bonds with an international equity weighting of 30% of total equities. Over a decade of investing, a hypothetical 70/30 investor moved all their equities to cash on March 6, 2009 (very close to the market bottom of March 9), and then redeployed half of the cash to equities on June 30 of that year, and the other half on December 31—after the market was considered to have “settled down.”

Assuming a starting portfolio value of $100 million on December 31, 2005, the chart below tracks what would have happened to the portfolio, if the tactical approach was taken and the equity allocation was moved to cash, thus locking in the losses but hoping to avoid further ones. If the portfolio had been permitted to continue to follow its strategy—the “long-term” line—it would have recovered from the unrealized loss. Through December 31, 2015, both versions of the portfolio would have grown, but the tactical portfolio would have been about $46 million less than the long-term track, the result of being out of the market during the critical time of recovery.

Discipline can pay off in the long term


Source: Morningstar. For the stock portion of the hypothetical portfolio, the following funds were used: Vanguard Total Stock Market Index Fund and Vanguard Total International Stock Index Fund. For the bond portion of the portfolio, Vanguard Total Bond Market Index Fund, Vanguard Intermediate-Term Investment-Grade Fund, and Vanguard Short-Term Investment-Grade Fund were used. For the cash portion of the portfolio, Vanguard Prime Money Market Fund was used. This is a hypothetical  illustration only and is not intended to represent the actual return on any given investment.

So instead of making tactical moves during times of market turbulence, it’s always best to revisit the fundamental principles of investing success:
  • Review the long-term investment goals of your portfolio.
  • Ensure that the portfolio has an asset allocation that can reasonably meet those goals.
  • Keep most of what you earn by minimizing costs.
  • Maintain perspective and long-term discipline.

It may feel like you’re missing out if you’re not taking steps to move money around tactically in a time of crisis. Sticking with your long-term investment plan when it seems most difficult to do so can take true intestinal fortitude—and sometimes not taking action can give you a better chance of success.

¹Sources for U.S. stock returns over 89-year period: Standard & Poor’s 90 from 1926 through March 3, 1957; Standard & Poor’s 500 Index from March 4, 1957 through 1974; Wilshire 5000 Index from 1975 through April 22, 2005; MSCI US Broad market Index thereafter.

²From Vanguard research, Putting a value on your value: Quantifying Vanguard Advisor’s Alpha, by Francis M. Kinniry Jr., CFA, Colleen M. Jaconetti, CPA, CFP®, Michael A. DiJoseph, CFA, and Yan Zilbering, 2014.


  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss.