Five principles of smart investing

Five principles of smart investing

Stick to the proven basics to win the battle of the bear


Investors have had to grapple with a series of difficult events to start the year, with heightened geopolitical risks, rising inflation, changing central bank policies, and ensuing volatility in capital markets adding up to greater overall uncertainty about where the markets will be headed for the rest of 2022. 

This recent turbulence has made the role of financial advisors even more critical. In fact, recent research from Vanguard found that investors believe financial advice provides a perceived value-add of 5% to annual performance versus “going it alone.”1

While investing in the stock market is typically a prudent choice for investors seeking long-term growth, sharp drops can test the patience of even the most disciplined investors. Here are five research-tested strategies to help investors navigate through periods of uncertainty and resist the temptation to “do something.”

1. How geopolitical risks affect stock returns

With a perspective of recent geopolitical events in Ukraine, investors worry that geopolitical developments may significantly impact asset returns. However, upon examining various geopolitical events over the past 60 years (Chart 1), we find that while equity markets may react negatively to the initial news, geopolitical selloffs are typically short-lived and returns over the following 12-month period are largely in line with long-term averages.

2. Short-term volatility and bear markets are inevitable, but a long-term focus has been a winner

Short-term volatility has always been part of investing. Extreme and extended cases of volatility have frequently coincided with market pullbacks. But investors should focus on the long term.

Research shows that despite periods of high volatility that have coincided with market pullbacks, equity markets have climbed over the long term (Chart 2).

From December 31, 1982, through December 31, 2021, the S&P 500 and MSCI World indexes faced several periods of extreme market volatility, most notably after the stock market crash of 1987, the global financial crisis in 2008, and the start of the Covid-19 pandemic early in 2020. However, despite sharp market pullbacks that coincided with these periods of volatility, both the indexes have continued to move on to greater heights (Chart 3).

3. Longer-term investing reduced likelihood of a negative return

History shows the longer investors stay invested, the less the likelihood that they will earn a negative return.

Over a 10-year holding period, a portfolio of 60% stocks and 40% bonds hasn’t had a negative nominal return (not accounting for inflation) and has had significantly less likelihood for after-inflation negative returns than over a shorter holding period. Moreover, many investors think of U.S. Treasury bills as safer than equities. But when adjusted for inflation, Treasury bills have been more likely than stocks to have negative returns. And this finding is even more relevant in the current high-inflationary period.

4. Investors shouldn’t overreact to bear markets

While bear markets can be unnerving for investors, on average they have been much shorter than bull markets and have had far less of an effect on long-term performance. From January 1, 1980, through December 31, 2021, the average length of a bull market has been nearly four times that of a bear market. The depth of losses from a bear market has paled in comparison with the magnitude of bull-market gains. That’s a major reason for sticking to a long-term investing plan. Losses from a bear market have typically given way to longer and stronger gains.

5. Investors shouldn’t try to time the market. It’s harder than it looks.

Timing the market and knowing when to pull money out and put it back in is incredibly difficult. One major reason is that investors run the risk of missing out on strong performance, which can seriously hamper long-term investment success. Historically, the best and worst trading days have tended to cluster in brief time periods, often during periods of heightened market uncertainty and distress, making the prospect of successful market-timing improbable .

Our research shows that the best and worst trading days often occur within days of each other. Nine of the 20 best trading days as measured by the S&P 500 Index from January 1, 1980, through December 31, 2021, occurred during years of negative total returns. Meanwhile, 11 of the 20 worst trading days occurred in years with positive total returns, another sign of the futility of market timing.

Finally, as an investor, you cannot time the market and you cannot control the market. 

What you can do is control your asset allocation, diversification and your costs or the investment fees you pay. No matter the market situation, stick to four enduring investment principles 

  1. Set appropriate investment goals
  2. Develop a suitable asset allocation using broadly diversified funds 
  3. Minimize costs or your investment fees, and finally;
  4. Maintain perspective and long-term discipline. 

Put simply, stay the course!


1Sources: Vanguard and Escalent, 2021.

Bilal Hasanjee, CFA, MBA, MSc Finance, is Senior Investment Strategist at Vanguard Investments Canada.


© 2022 by Vanguard Group. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. This article first appeared in June 2022 on the “Insights“ page of the Vanguard Group, Inc.’s website. Used with permission.

The views expressed in this material are based on the author's assessment as of the first publication date (July 2021), are subject to change without notice and may not represent the views and/or opinions of Vanguard Investments Canada Inc. The author may not necessarily update or supplement their views and opinions whether as a result of new information, changing circumstances, future events or otherwise.

Certain statements in this presentation may be considered "forward-looking information" which may be material, involve risks, uncertainties or other assumptions and there is no guarantee that actual results will not differ significantly from those expressed in or implied by these statements. Factors include, but are not limited to, general global financial market conditions, interest and foreign exchange rates, economic and political factors, competition, legal or regulatory changes and catastrophic events. Any predictions, projections, estimates or forecasts should be construed as general investment or market information and no representation is being made that any investor will, or is likely to, achieve returns similar to those mentioned herein.

While this information has been compiled from proprietary and non-proprietary sources believed to be reliable, no representation or warranty, express or implied, is made by The Vanguard Group, Inc., its subsidiaries or affiliates, or any other person (collectively, "The Vanguard Group") as to its accuracy, completeness, timeliness or reliability. The Vanguard Group takes no responsibility for any errors and omissions contained herein and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this material.

Information, figures and charts are summarized for illustrative purposes only and are subject to change without notice.

In this material, references to "Vanguard" are provided for convenience only and may refer to, where applicable, only The Vanguard Group, Inc., and/or may include its affiliates, including Vanguard Investments Canada Inc.

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

Commissions, management fees, and expenses all may be associated with investment funds. Investment objectives, risks, fees, expenses, and other important information are contained in the prospectus; please read it before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated. Vanguard funds are managed by Vanguard Investments Canada Inc. and are available across Canada through registered dealers.

This material is for informational purposes only. This material is not intended to be relied upon as research, investment, or tax advice and is not an implied or express recommendation, offer or solicitation to buy or sell any security or to adopt any particular investment or portfolio strategy. Any views and opinions expressed do not take into account the particular investment objectives, needs, restrictions and circumstances of a specific investor and, thus, should not be used as the basis of any specific investment recommendation. Investors should consult a financial and/or tax advisor for financial and/or tax information applicable to their specific situation.

All investment funds, including those that seek to track an index are subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in a declining market. While the Vanguard ETFs are designed to be as diversified as the original indices they seek to track and can provide greater diversification than an individual investor may achieve independently, any given ETF may not be a diversified investment.

All monetary figures are expressed in Canadian dollars unless otherwise noted.