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Market volatility is here how are Vanguard Investors reacting?

Vanguard’s investment philosophy is based on four principles, among them maintain perspective and long-term discipline.

That straightforward mantra isn’t always easy to follow when put to the test, however. Vanguard Investment Strategy Group’s Investor Behavior research team has long analyzed how investor expectations have changed amid different market conditions and how those changes have affected investor behavior. The team’s analysis includes 33 investor survey installments over the past five years, conducted through a partnership with academic researchers Stefano Giglio, Matteo Maggiori, Johannes Stroebel, and Stephen Utkus. 

Vanguard’s June 2022 Investor Expectations survey uncovered short-term apprehension, which is expected given the current market volatility. And yet Vanguard investors overwhelmingly have stayed the course. 

Bimonthly survey results and U.S. self-directed household monthly trading

The bimonthly survey poses 13 brief questions about future U.S. stock market and economic growth expectations to a random sample of 2,000 Vanguard retail and 401(k) investors. Of particular interest were the responses to four of those questions: 

  • What do you expect the return of the U.S. stock market to be over the next 12 months? 

  • What do you expect the annualized return of the U.S. stock market to be over the next 10 years?

  • What do you expect the average growth of real gross domestic product (GDP) in the U.S. to be over the next three years?

  • How likely do you expect a disaster scenario to be during the next year, with “disaster” defined as a market drop of 30% or more?

Figure 1: Expectations are subdued for the short term, more robust for the longer term

Notes: The chart shows results from a June 2022 bimonthly Investor Expectations survey of a random sample of approximately 2,000 Vanguard retail and 401(k) investors. 

Lowest expectations yet for one-year stock market performance 

The average Vanguard investor anticipates a one-year stock market return of less than 1%, the lowest expectation we have seen since we started measuring investor sentiment in early 2017. Just one year ago, that expectation was close to 6.5%. The one-year return of the Standard & Poor’s 500 Index, a proxy for U.S. stock market performance, was –10.62% during that period (the 12 months ending June 30, 2022). 

Even so, a long-term perspective matters. “Only a small fraction of Vanguard’s nine million investors initiated trades in response to recent market volatility,” said Xiao Xu, a Vanguard investment strategy analyst. “That’s a result that’s consistent with our long-standing findings.” So far this year, just 14.3% of households with self-directed accounts have traded; among those, more than half launched just one trade. Even more telling: Most trading households moved money into equities rather than fixed income. When taken together, these results point toward an expectation for a steadier state over the longer term among Vanguard investors. 

Figure 2: Traders ride the volatility wave and maintain course 

Note: Trading data reflect nine million Vanguard self-directed investor households and plan participants. Vanguard, June 2022.

Expectations for a market crash rose 

 Respondents forecasted a 7.5% likelihood of a market crash or disaster (defined as a one-year return of –30% or worse). That’s compared with an almost 8% forecasted likelihood of market disaster during April 2020, just as Americans were tiring of COVID-related lockdowns.

“It’s interesting to recall that in mid-March 2020, the S&P 500 Index fell 30% from its record high. That was just before a wave of state-by-state COVID-related stay-at-home orders were mandated,” said Jean Young, a Vanguard senior investment strategist. “That April, just as we were collecting these investor sentiment survey responses, the market started to rebound. It spiked, and then it continued to climb for more than two years.” 

In short: History shows that it’s nearly impossible to predict the timing of a market rebound. Stay-the-course investors are often able to participate in a post-crash rally just by staying invested.

Expectations for three-year GDP growth dropped

Expectations for longer-term GDP growth dropped somewhat from earlier in the year—to a 2.5% average annual gain over the next three years—but not to the 2.2% level seen in April 2020. 

“Still, it is worth noting that these most recent survey responses were collected in June, which coincided with the market’s recent slide into bear territory,” Xu said. “It could be interesting to see how these three-year economic growth expectations change when investors are surveyed again in August.” 

Investor expectations could worsen when results are collected next, but it’s worth noting that the three-year GDP expectation did bounce back by the end of 2020, even after a months-long post-lockdown dip. 


Figure 3: Investor expectations take a hit on economic growth

Notes: The chart shows results from a June 2022 bimonthly Investor Expectations survey of a random sample of approximately 2,000 Vanguard retail and 401(k) investors. 

No action is often the best course of action

Despite a recent rocky road, it’s wise to remember that investors have historically benefited from a stay-the-course investment strategy. A July 2020 Vanguard research paper, Cash Panickers: Coronavirus Market Volatility, found that the vast majority of investors would have experienced more attractive returns by staying invested through COVID-related market turmoil. 

“Trading in response to market volatility requires an investor to get two timing decisions correct: when to exit the market and when to reenter,” said Young, who coauthored the paper. “Staying put financially often leads to participation in a post-crash rally, which, in the case of the COVID timeline, left those investors in a more attractive position than their trading counterparts.” 


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