“Keep your head when all about you are losing theirs.”
—Rudyard Kipling
It’s been a month since war erupted in the Middle East between the U.S., Israel and Iran. And with only a handful of Vanguard funds in the black in March, it hasn’t been an easy stretch for investors—though the market’s rally on the final day of the month helped ease some of the pressure.
500 Index (VFIAX) fell 5.0% on the month and now sits 6.2% below its January 27 high. The flagship index fund was closer to correction territory (a drop of 10% or more from a prior high) before rallying 2.9% on the 31st.
Some corners of the market have fared even worse. Total International Stock Index (VTIAX) declined 8.6% in March, and foreign stocks were in correction territory until Tuesday’s rally.
Making matters worse, traditional safe havens haven’t held up as well as some might expect.
U.S. Treasuries, typically a reliable port in the storm, declined. With investors increasingly concerned about inflation, they demanded higher yields—pushing bond prices lower. As the yield on the 10-year Treasury rose from 3.97% to 4.30% in March, Long-Term Treasury ETF (VGLT) fell 4.0%.
Even gold failed to provide shelter. Despite geopolitical tensions and inflation fears, the shiny metal sold off, falling 11% on the month.
One asset class did exactly what it was supposed to do: cash.
Vanguard’s money market funds held steady and delivered modest gains. Federal Money Market (VMFXX), for example, rose 0.3%. Likewise, Vanguard’s near-cash funds—0–3 Month Treasury Bill ETF (VBIL), Ultra-Short Treasury ETF (VGUS) and Short-Term Inflation Index (VTAPX)—also held up.
Outside of cash and cash-like funds, only four Vanguard funds posted gains in March:
- Energy ETF (VDE): 10.4%
- Commodity Strategy (VCMDX): 6.0%
- Energy (VGENX): 4.5%
- Market Neutral (VMNFX): 2.5%
No surprise here—energy stocks and commodities rallied as oil prices spiked. And credit where it’s due: Market Neutral delivered positive returns in a difficult environment. (You can read more about it here.)
With the first quarter over and no clear view of where we’re headed, how should we assess what’s taken place so far? How does this inform our positioning for the months ahead?
First, even with so many funds in the red at the same time, diversification has not failed.
Consider the performance of Vanguard’s various LifeStrategy funds in March:
- LifeStrategy Growth (VASGX)—80% stocks—down 5.6%
- LifeStrategy Moderate Growth (VSMGX)—60% stocks—down 4.7%
- LifeStrategy Conservative Growth (VSCGX)—40% stocks—down 3.8%
- LifeStrategy Income (VASIX)—20% stocks—down 2.8%
The pattern is exactly what you’d expect: The more conservative the portfolio, the smaller the drawdown.
Second, remember that pullbacks, corrections and bear markets are part of the deal when you’re an investor.