Vanguard CIO Warns Investors Against Market Timing

Davis doesn’t seem to make an exception for sitting on the sidelines to wait out the Federal Reserve’s current rate-hike cycle.

“Over the long run, maintaining a steady, strategic approach has proven itself time and again — through periods of high inflation, low inflation, bull markets, bear markets, and a variety of business cycles,” he said.

“That said, trepidation is only human during periods of volatility like this. And each individual is unique in their circumstances, finances, time horizons, and risk temperaments.”

He recommended investors consider consulting an advisor who has a fiduciary duty to look after their interests, whether they establish an ongoing relationship, engage in a one-off session or turn to digital advisors.

Don’t Count Balanced Portfolios Out

Davis also called it premature to proclaim the end of the “traditional balanced portfolio.”

While the diversification benefits of bonds have waned this year as the correlation between fixed income and equities rose, this has happened before, he said. More often, and in the long term, bonds are a stabilizing force in portfolios during stock market volatility, and also provide an income benefit, he noted.

“Given the rise in interest rates, our expected returns for bonds over the next decade have increased by almost 2% since September 2021,” Davis wrote. “Holding bonds makes even more sense now, and they still play an important role in a well-diversified portfolio.”

As for younger investors, the market now appears particularly favorable, he added.

“With the recent sell-off, equity markets are now near fair value. In the fixed income markets, while rising interest rates cause near-term pain for investors, higher rates have raised return expectations,” Davis said.

“If you’re still in the accumulation phase of your investment life, you want to be buying at cheaper prices. Which is why, when the markets get challenging, like they are now, it’s essential that investors stay focused on their long-term goals and not get obsessed with their account balance today.”

Citing the advantages of compound returns, and recommending broad diversification via low-cost mutual funds and ETFs, Davis wrote, “the cumulative impact of little incremental gains over time is astounding. But you won’t get that compounding if you’re not invested.”