Vanguard: 'Here's how to navigate through market uncertainty'

'Stay the course'. Joe Davis remains firm in his convictions and decisive in indicating the behaviour to follow during phases of market turbulence, including that triggered by the escalation of the war in the Middle East, and investors seem for the time being to follow the advice coming from Vanguard's global chief economist: avoid impulsive choices and remain faithful to the philosophy adopted by Jack Bogle himself, founder of the US investment giant.

Adhering to his four investment principles - clear objectives, diversification, low costs and, indeed, discipline - remains of paramount importance, all the more so in such situations. "These simple rules can help you manage market uncertainty, avoid emotional mistakes and take advantage of the compounding effects that returns have on your portfolio," says Davis, who was met by Il Sole 24 Ore in London at the Vanguard Group's 50th anniversary celebrations.

History is, after all, ready to show how investors who were able to withstand and overcome sharp swings in the stock markets were then rewarded in terms of returns. "This was the case after the bursting of the Internet bubble, with the great financial crisis, during the pandemic, and continues to be the case today," notes Davis, and the data cited by Vanguard is without appeal, or nearly so.

Over the past 25 years, taking refuge in cash for three months when things go wrong would have ultimately exposed the saver to the risk of underperforming the classic 60/40 portfolio composed of 60% stocks and 40% bonds in 58% of cases and to a median 'loss' of 1.4%. Staying parked in 'cash' for 12 months would even extend the chances to 60% and the overall underperformance to 6.7%. "This," explains Vanguard's economist, "is because those who decided to sell after the first stock market shocks may well have avoided some of the downturns, but they certainly missed all the upturns that followed.

But if opportunistic market entry and exit often proves to be counterproductive "also because the worst and best sessions tend to follow each other in short order", Davis nevertheless urges not to take the instruction to always keep the bar on the straight and narrow as an absolute dogma. "The basic principle," he admits, "remains fundamental, but it certainly does not mean ignoring the risks on the horizon, and indeed changes can be made to the portfolio to protect against increasing downside risk. A green light is therefore given to possible changes, provided they take place 'in a measured manner, without a complete withdrawal from the financial markets' and are above all 'aimed at better risk management, not a blind search for tactical outperformance'.