Vanguard produced a very nice infographic regarding market volatility following significant geopolitical events like the war in Ukraine. After reviewing the information, I was surprised that, historically speaking, the initial sell-off following a significant geopolitical event was not more severe. No one can predict exactly how markets will respond to the current event in coming weeks, but it is good to have some historical perspective.
As long-term, goal-focused investors, we should never make long-term decisions based on short-term events. Therefore, we will stick with our well-planned strategy while maintaining awareness of current events. Remember our basic tenets of investing patience, discipline, faith in the future.
General Principles
- You and I are long-term, goal-focused, plan-driven investors. We believe that the key to lifetime success in investing is to act continuously on a specific, written plan. Likewise, we believe substandard returns and even investment failure proceeds inevitably from reacting to, (let alone trying to anticipate), current economic/market events.
- We're convinced that the economy cannot be consistently forecast, nor the markets consistently timed. Therefore, we believe that the only reliable way to capture the full long-term return of equities is to ride out their frequent but historically always temporary declines.
- Just in the last four decades or so, the average annual price decline from a peak to a trough in the S&P 500 exceeded 14%. One year in five, the decline has averaged at least twice that. And on two occasions, (2000-02 and 2007-09), the index has actually halved. Yet the S&P 500 came into 1980 at 106 and went out of 2021 at 4766.18*; over those 42 years, its average annual compound rate of total return, (that is, with dividends reinvested), was more than 12%.
- These data underscore my conviction that the essential challenge to long-term successful equity investing is neither intellectual nor financial, but temperamental: it is how one reacts, or chooses not to react, to market declines.
- These principles will continue to govern the essentially behavioral nature of my advice to you now and in the future.
*https://www.wsj.com/market-data/quotes/index/SPX/historical-prices
This is intended for informational purposes only. Keep in mind that investors must consider their risk tolerance and investment objectives to stay invested during down markets. Past performance does not guarantee future results and investing during any market cycle poses risks including the loss of principal. The S&P 500 is an unmanaged index which cannot be invested into directly.