Vanguard CIO Warns Investors Against Market Timing

Vanguard’s chief investment officer recommends a steady, well-diversified investment approach, even as stocks continue to slide amid rising interest rates, recession fears and high inflation.

Trying to forecast a stock market bottom is always difficult and investors, including professional money managers, are unlikely to come out ahead trying to time the market, Vanguard CIO Greg Davis said in a post Monday.

“Not only do you have to be right on when to get out of the market, you have to be right on when to get back in. Successfully timing the stock market is near impossible, partly because the best trading days tend to cluster around the worst ones,” Davis wrote.

Trying to time investments by leaving a down market could mean missing key rallies and a much higher return, he suggested.

Davis’ commentary appeared as the market reeled Monday, with the S&P 500 reaching a new 2022 low. Bloomberg noted stocks were in free fall as bearish sentiment persisted amid rising global interest rate hikes.

The advice for clients to stay the course even in volatile markets is hardly new, although investors are bombarded daily with expert commentary suggesting they buy or sell various securities. (Vanguard’s late founder, John C. Bogle, used “stay the course” in the title of his 2018 book about the mutual fund giant’s history.)

Just this week, BlackRock has urged investors to “shun most stocks” in the short term and Goldman Sachs went underweight on equities in its global allocation for the next three months.

Vanguard’s Davis laid out the risks associated with market timing and the potential rewards for maintaining a regular investing strategy. Moreover, he advised younger investors that the current market climate can be especially appealing for them and said equities markets were “near fair value.”

Timing Risk: Missing Key Rallies

A look at S&P 500 daily price returns from 1980 through 2021 shows that nine of the 20 best trading days came in years with negative total returns, while 11 of the 20 worst trading days occurred in years with positive returns, the CIO said, citing data from Refinitiv.

“Missing just a few of those rally days has a surprisingly outsized impact,” Davis wrote. “Looking at market data going back much further, to 1928, being out of the stock market for just the best 30 trading days would have resulted in half the return over that period. It pays to remain invested and balanced precisely when it is most difficult to do so.”

While Vanguard expects a mild U.S. recession in the next 24 months — it recently predicted a 65% recession likelihood for the next two years — financial markets may already have accounted for that development, he said.

“None of this negates the benefits of staying the course with an investment approach focused on low cost, balance, and diversification,” he added.