It’s quite common. During periods of market volatility, some clients may feel the urge to sell their portfolio holdings and wait out the storm in cash. Their reasoning might be something like, “I can always get back in once markets stabilize and start to rise again.”
While their desire for short-term safety is understandable (and it’s important to show empathy for their concerns), you can guide them toward a more constructive approach by explaining the benefits of staying invested and avoiding the pitfalls of market timing.
In these critical moments, your experience and informed guidance can play a crucial role in easing client anxieties and protecting their long-term financial goals. As we’ll discuss in this article, investors can maximize their gains during a recovery by remaining invested through turbulent markets. Missing just a few of the best-performing days during a recovery can significantly impact their long-term returns. That said, it’s worth revisiting client asset allocations and risk tolerances to ensure they’re aligned with your clients’ current situation and evolving needs.
Stock market volatility can feel unnerving, but history has shown that some of the best days in the market often follow bad ones, as seen in Figure 1. The practical effect is that the market moves too quickly and unpredictably for someone to trade large portfolio positions, in and out, effectively. One could easily mis-time big market moves, and the transaction costs of attempting to keep pace with them would be significant.
Figure 1: The best and worst days tend to cluster close together
S&P 500 Index daily price returns January 1, 2020, through December 31, 2024
Past performance is no guarantee of future returns. 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 Advisory Research Center calculations using FactSet data. Data through December 31, 2024. Data series for ~2% and ~80% statistics covers January 1, 1980, through December 31, 2024.
Further, the effects of missing strong recovery days compound over time. Figure 2 provides a compelling example of what this can look like for a client portfolio. Given a hypothetical $100,000 portfolio tracking the S&P 500 Index (starting in 1988), we can see the portfolio’s 2024 value if that money remained invested the entire time ($4.9 million), if it were out of the market for 10 of the best-performing days ($2.3 million), if it had missed 20 of the best days ($1.4 million), and if it were out of the market for 30 of the best days ($0.9 million).
Figure 2: Missing the best days of the market, which often cluster around the worst days, can be costly
S&P 500 Index, total returns of $100,000 investment, 1988–2024
Past performance is no guarantee of future returns. 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 Advisory Research Center calculated using data from Standard & Poor’s. As of December 31, 2024.
Note: Return percentage calculated over a 37-year period: 11.1% = all days in the market, 8.9% = missing 10 best days, 7.3% = missing 20 best days, 6.0% = missing 30 best days.
For most clients, a difference of $2.6 million, or 52% over 37 years, would equate to a significant difference in their lifestyle, financial confidence, and ability to achieve desired financial outcomes. And this difference could come from simply having the discipline to maintain market exposure when 10 of the best market days happened to occur. Conversely, at the illustrated extreme of missing 30 of the best days (which, again, happen near the worst days), the long-term portfolio impact of $4 million, or 82%, is nothing short of stunning.
Stay the course is often mistaken for buy and hold or set it and forget it, both of which are passive strategies, but it actually means the opposite. Just as a ship with a set course and destination can be pushed off its path by the tides and winds, an investor’s asset allocation can deviate from its target because of the relative performance of the assets in the portfolio. In both cases, a correction is necessary to stay on-course with the plan to achieve desired outcomes. With investing, an asset allocation plan is made to meet the long-term goals and objectives of the client—taking into account their time horizon and risk tolerance. But market returns vary and, as a result, so will clients’ asset allocations, thus requiring the advisor to take action by rebalancing the portfolio.
And while that may sound easy, the task of rebalancing is often an emotional challenge. Because rebalancing opportunities occur when there is a wide dispersion between the returns of different asset classes (such as stocks and bonds), reallocating assets from the better performing asset class(es) to the worst performing one(s) feels counterintuitive. This is why it is important to develop a rebalancing strategy with your clients in advance; this will help separate the emotion from the investment decision. Additionally, staying the course involves active engagement with clients, providing empathy and perspective, and, in some cases, recalibrating risk tolerances, goals, and objectives if warranted.
Asset allocation is often best learned through time and the relationship management process. Risk questionnaires and client onboarding meetings are great starting points, but over time, life events can significantly impact a client’s time horizon, risk tolerance, and financial goals. For instance, the birth of a child, job loss, the death of a spouse or partner, an inheritance, or even lottery winnings can all necessitate changes to their asset allocation.
However, equally important and likely more frequent than these life events is the ongoing relationship and conversations with clients during both bull and bear market environments. These interactions help us better understand a client’s "true" risk tolerance, which may differ from their initial assessment during onboarding. For example, how clients react to rebalancing conversations in bear markets versus bull markets, during periods of volatility, or when certain style or factor tilts are out of favor can provide valuable insights.
These discussions can help infer more suitable allocations and portfolios. Ultimately, the appropriate allocation is one that a client will implement and rebalance to, both in the best and worst of times, and this is often learned through these moments and the relationship management process.
To be clear, every bull-bear cycle has its unique catalysts, contributors, economic effects, and ultimately, resolutions. Past performance is never any guarantee of future results, especially with a mechanism as complex as interconnected global financial markets.
With that noted, we can consult the past to help investors act in service of their goals rather than as a counterproductive reaction to fear. Notably, after past market corrections (a financial threshold where the market trades down 10%), the average forward returns for 1 year, 3 years, and 5 years have been positive (Figure 3).
Figure 3: The average return 1, 3, and 5 years after drawdowns reach correction territory is positive
Cumulative returns after U.S. equities reach market correction territory
Past performance is not a guarantee of future returns. 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 Advisory Research Center using data as of March 31, 2025.
Notes: Equities represented by the Wilshire 5000 Index from 1980 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. We then calculated the cumulative daily returns for 1, 3, and 5 years of equities after the point in which drawdowns exceeded 10% and graphed the average.
Staying invested is highly emotional, not easy to do, and may come as a particularly tough ask for clients with current portfolio income needs. We have seen, historically, that previous volatility episodes always come with headlines and narratives of why this time it will be worse or different.
So far, each of them has shown how critical it is to stay invested and not interrupt the power of compounding. Helping clients understand concepts like this and keep their long-term goals in historical perspective exemplifies the Vanguard Advisor’s Alpha® framework in action.
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