Market volatility slide library 2020 updates 1 Geopolitical - - PowerPoint PPT Presentation

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Market volatility slide library

2020 updates

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Geopolitical sell-offs are short-lived

Notes: Not shown in the above charts, but included in the averages, are returns after the following events: the Suez crisis (1956), construction of the Berlin Wall (1961), assassination of President Kennedy (1963), authorization of military operations in Vietnam (1964), Israeli-Arab Six-Day War (1967), Israeli-Arab War/oil embargo (1973), Shah of Iran's exile (1979), invasion of Grenada (1983), U.S. bombing of Libya (1986), First Gulf War (1991), President Clinton impeachment proceedings (1998), Kosovo bombings (1999), multi-force intervention in Libya (2011), and the U.S. anti-ISIS intervention in Syria (2014). Sources: Vanguard calculations, using data from Thomson Reuters and FactSet.

Cuban missile crisis 1962 Key 1 year later 6 months later Initial sell-off (length varies President Nixon impeachment proceedings 1974 Iranian hostage crisis 1979 Soviet invasion

• f Afghanistan

1979 Iraq War 2003 Arab Spring (Egypt) 2011 Ukraine conflict 2014 Brexit vote 2016 –6% 21% 27% –4% –3% 3% 26% –5% 6% 26% –15% –16% –3% 19% 29% –2% 5% 5% –1% 9% 14% –5% 9% 18% 5.3% Average total return 6 months from event 9.8% Average total return 1 year from event

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Don’t let turbulence distract you: Keep your focus on the longer term

Volatility and index prices for the S&P 500

Note: Intraday volatility is calculated as the daily range of trading prices ([high-low]/opening price) for the S&P 500 Index. Sources: Vanguard calculations, using data from Thomson Reuters.

3,500 1982 1988 1994 2000 2006 2012 2018 0% 7% S&P 500 Index 30-day average Intraday volatility

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Longer holding periods reduce the chances of a negative return

0% 10% 20% 30% 40% 50% 1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years 1 Year 3 Years 5 Years 10 Years

Historical probability of negative return

Notes: Rolling return periods at quarter-end assuming yearly compounding. Nominal value is the value of anything expressed in money of the day, versus real value, which includes the effect of inflation. When determining which index to use and for what period, we selected the index that we deemed to be a fair representation of the characteristics of the referenced market, given the information currently available. For U.S. stock market returns, we use the Standard & Poor's 90 from 1926 through March 3, 1957, the Standard & Poor's 500 Index from March 4, 1957, through 1974, the Wilshire 5000 Index from 1975 through April 22, 2005, the MSCI US Broad Market Index from April 23, 2005, through June 2, 2013, and the CRSP US Total Market Index thereafter. For U.S. bond market returns, we use the Standard & Poor's High Grade Corporate Index from 1926 through 1968, the Citigroup High Grade Index from 1969 through 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 through 1975, the Bloomberg Barclays U.S. Aggregate Bond Index from 1976 through 2009, and the Bloomberg Barclays U.S. Aggregate Float Adjusted Index thereafter. For U.S. cash reserve returns, we used the Ibbotson 1-Month Treasury Bill Index from 1926 through 1977, and the FTSE Three-Month Treasury Bill Index thereafter. Source: Vanguard Investment Strategy Group, as of December 31, 2019.

100% stocks 100% T-bills 60% stocks/40% bonds Holding period in years Nominal returns Real returns Nominal returns Real returns Nominal returns Real returns Benefit of diversification: A 60/40 portfolio has 36% less volatility than the 100% stocks portfolio Understanding inflation risk: When adjusted for inflation, U.S. Treasury bills are more likely than stocks to have negative returns

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Downturns aren’t rare events: Typical investors, in all markets, will endure many of them during their lifetime

Global stock prices

Sources: Vanguard analysis based on the MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI AC World Index thereafter. Both indexes are denominated in U.S. dollars. Our count of corrections excludes those that turn into a bear market. We count corrections that

• ccur after a bear market has recovered from its trough even if stock prices haven’t yet reached their previous peak.

Bear markets Bull markets

One attention-grabbing downturn every two years 13 corrections

Decline of 10% or more

8 bear markets

Decline of 20% or more, at least two months long 1,000 2,000 1979 1989 1999 2009 2019

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Timing the market is futile: The best and worst trading days happen close together

S&P 500 Index daily returns

Source: Vanguard.

Thirteen of the 20 best trading days occurred in years with negative annual returns Nine of the 20 worst trading days occurred in years with positive annual returns

• 25%
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0% 5% 10% 15% Returns

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During recent major downturns, index funds remained net buyers

Net new cash flows (in billions) into index funds during recent major downturns

Notes: The two time periods are defined by the months in which the S&P 500 Index experienced price levels from peak to trough. Monthly flows are represented by funds denoted as index. Sources: Vanguard calculations, using data from Morningstar Inc.

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2 4 6 8 10 12 14 2000–03 2002–10 ETFs Mutual funds

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10 20 30 40 50 60 2007–10 2009–03 ETFs Mutual funds

Tech bust bear market

Peak to trough March 2000 to October 2002

Global financial crisis bear market

Peak to trough October 2007 to March 2009

$172B net flows $306B net flows

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Bear markets: A fact of life before (and after) the advent of indexing

Notes: S&P 500 Index value reflects the growth of the S&P 500 Index (total return) from January 1, 1928, to December 31, 2019, based at an original value of 100, and is presented in logarithmic scale. Index fund asset percentage is defined as the percentage of assets in U.S.-domiciled U.S. equity index funds divided by market capitalization of the Russell 3000 Index. Bear markets are defined by Yardeni Research Inc. Vanguard Marketing Corporation, Distributor. Sources: Vanguard, using data from Morningstar Inc. and Yardeni Research Inc.

Arab oil embargo, Watergate Tech bust, 9/11 terrorist attacks Global financial crisis Great Depression Index fund asset percentage 16% 1976 Vanguard launches what became the 500 Index Fund, the first index fund for individual investors 1927 1937 1947 1957 1967 1977 1987 1997 2007 2017 S&P 500 index value (January 1, 1928 = 100) 10,000x 1,000x 100x 100 10x 0.1x Bear markets Index fund assets, as a percentage of U.S. market capitalization S&P 500 Index

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Expected long term returns rise with higher stock allocations, but so does short-term risk

Range of calendar-year returns, 1926–2019 Each circle represents one year of returns (94 circles per allocation)

Notes: Stocks are represented by the Standard & Poor’s 90 Index from 1926 through March 3, 1957; the S&P 500 Index from March 4, 1957, through 1974; the Wilshire 5000 Index from 1975 through April 22, 2005;the MSCI US Broad Market Index from April 23, 2005, through June 2, 2013; and the CRSP US Total Market Index thereafter. Bonds are represented by the S&P High Grade Corporate Index from 1926 through 1968;the Citigroup High Grade Index from 1969 through 1972; the Bloomberg Barclays U.S. Long Credit AA Index from 1973 through 1975; and the Bloomberg Barclays U.S. Aggregate Bond Index thereafter.Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Source: Vanguard Investment Strategy Group. Data as December 31, 2019.

60% 30 –60 –30 100% bonds 90%/ 10% 80%/ 20% 70%/ 30% 60%/ 40% 50% bonds/ 50% stocks 40%/ 60% 30%/ 70% 20%/ 80% 10%/ 90% 100% stocks

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Volatility: More the rule than the exception

Number of days in the previous 30 trading days where stocks fell or rose 1% or more

Sources: Vanguard calculations based on S&P 500 data from Thomson Reuters. Data are from December 31, 1999, through December 31, 2019.

Example: February 25, 2016 19 of the previous 30 trading days had stock movements

• f 1% or more

5 10 15 20 25 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

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Manage your expectations: In the short term, an investor’s experience is anything but the historical average

Annual stock and bond returns from 1926 through 2019

Notes: Dots represent each calendar year from 1926 through 2019 (94 points = 94 years) plotted at the intersection of that year’s stock return and that year’s bond return. The vertical shaded area contains all years whose stock return was between 8% and 12%. The horizontal shaded area contains all years whose bond return was between 3% and 7%. Stock returns are represented by the S&P 500 Index from 1926 through 1974, the Wilshire 5000 Index from 1975 through April 22, 2005, and the MSCI US Broad Market Index thereafter. Bond returns are represented by the S&P High Grade Corporate Index from 1926 through 1968, the Citigroup High Grade Index from 1969 through 1972, the Lehman Brothers U.S. Long Credit AA Index from 1973 through 1975, and the Bloomberg Barclays U.S. Aggregate Bond Index from 1976 through 2019. Sources: Vanguard calculations, using data from Thomson Reuters, FactSet, and MSCI.

Stock returns: 10.1% annual Average return range (8% to 12%) achieved in 6 of 94 calendar years Bond return: 5.3% annual Average return range (3% to 7%) achieved in 28 of 94 calendar years 2019 31% stock, 9% bond

Only 2 years

Had “average” stock returns and “average” bond returns 1926: 11.6% stock, 5.4% bond 1968: 11.0% stock, 4.5% bond

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5 10 15 20 25 30 35

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10 20 30 40 50 60 Bond Returns Stock Returns

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Diversification benefits of international stocks

Notes: Non-U.S. equities are represented by the MSCI World Index ex USA from 1970 through 1987 and the MSCI All Country World Index ex USA thereafter. U.S. stocks are represented by the MSCI USA Index. U.S. bonds are represented by the Citigroup High Grade Index from 1970 through 1972, the Bloomberg Barclays Long AA Corporate Index from 1973 through 1975, and the Bloomberg Barclays U.S. Aggregate Bond Index thereafter. Past performance is no guarantee of future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Diversification does not ensure a profit or protect against a loss. Sources: Derived from data provided by MSCI, Bloomberg, FactSet, and Thomson Datastream.

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0% 5% 10% 15% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% non-U.S. stocks (All U.S. stocks)

30%–40% of equities allocated to international stocks has the optimal effect reducing volatility.

Less volatility More volatility Less non-U.S. stocks More Non-U.S. equity allocation

–2.1% –4.2% –4.3% –2.3% 2.4% 9.2%

Average annualized change in portfolio volatility when including varying percentages of non-U.S. stocks in a 60% stocks/40% bonds portfolio, 1970–2018