Blog : Markets & Economy | September 12, 2022

Bear market considerations for DC plan participants

Kimberly Stockton

Senior Manager and Investment Research Analyst

A very good friend, who is a nurse, in her late 50s, and healthy, called me last week with a question: “I am watching my 401(k) account balance drop and wondering if I should move to cash now before things get worse?” Like many DC plan investors, my friend is understandably nervous and uncomfortable with the precipitous market declines this year. Stocks worldwide are down about 20% year to date as of June 30, 2022, while global bonds returned about –10%.1 Add to that the challenges of simultaneous downturns in stocks and bonds as well as muted expectations for future market performance.

So how did I respond to my friend, and how should other DC plan participants weather bear markets? To begin, core investment principles are even more important during bear markets: Stay diversified, maintain perspective, tune out the day-to-day noise, stick to your goals and strategic asset allocation, and embrace the power of the long term. Let’s consider some of the benefits of maintaining these core principles and the follies of abandoning them.

Ensure diversification within asset classes. With both stock and bond market downturns, the diversification benefit of combining asset classes remains but is muted. In this market environment, diversification within asset classes is paramount because it reduces a portfolio’s exposure to risks associated with a particular company, sector, or market segment. Owning a portfolio with at least some exposure to many or all key market components of an asset class can mitigate the impact of the weakest-performing areas. Consider this: The broad U.S. equity market is down about 20%, but growth stocks are down more than 28% and value stocks are down only 13%, as of June 30, 2022.2

Likewise, return variation among sectors is even higher. The best-performing sector in 2022, energy, returned a positive 30.2% as of June 30, 2022. Over the same period, the worst-performing sector, consumer discretionary, returned –33.7%.3 Vanguard Target Retirement Funds, the qualified default investment alternative (QDIA) in 97% of Vanguard-record-kept DC plans with a QDIA, provide just such broad diversification within markets along with a professionally managed portfolio.

Think long term. Bear markets—defined as a 20% or greater decline from recent highs—are short, and recovery is quick relative to the long time horizons of DC plan participants saving for retirement. The average bear market since 1956 lasted 14 months. Average recovery time from a bear market bottom is about 26 months over this same period.

Maintain strategic asset allocation. Ensure the strategic asset allocation reflects the risk tolerance in any market environment so that inevitable bear markets do not cause panic selling and locked-in losses. Life changes—not market changes—should determine asset allocation changes.

As shown in the illustration below, covering the period from the market peak of October 2007 through the market bottom of March 2009 and ending in December 2021, investors who abandoned their strategic asset allocation for 100% bonds or 100% cash did not fare well. For an investor who maintained a typical strategic asset allocation of 60% stocks/40% bonds and rebalanced throughout the entire period, the cumulative return on that portfolio was 287%. If this same participant panicked and sold out of their 60%/40% portfolio at the market bottom and moved into a 100% bond portfolio or 100% cash, the portfolio’s return over the entire period would have been only 64% and 7%, respectively.

The importance of maintaining strategic asset allocation during times of market distress

Notes: The initial allocation for the portfolio is 42% U.S. stocks, 18% international stocks, and 40% U.S. bonds. The rebalanced portfolio is returned to a 60% stock/40% fixed income allocation each month-end. Returns for the U.S. stock allocation are based on the MSCI US Broad Market Index. Returns for the international stock allocation are based on the MSCI ACWI ex USA Index. Returns for the bond allocation are based on the Bloomberg U.S. Aggregate Bond Index, and returns for the cash allocation are based on the Bloomberg 3-Month US Treasury Bellwethers Index. Past performance is no guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

Sources: Vanguard calculations using data from Morningstar as of December 31, 2021.

Bottom line: Don’t try to time the market. In theory, market-timing, which is the strategy of avoiding losses by moving to cash at a market peak and returning to the market at its trough, is appealing. Unfortunately, the reality is that timing strategies are incredibly difficult to implement, even for professionals. One reason is that it requires precision, knowing exactly when to sell out and exactly when to buy back in. And, historically, the best and worst trading days have come close together, making it difficult to avoid one without the other. Some of the best trading days have occurred during periods of long market downturns. For example, 9 of the 20 best trading days from 1980 to 2021 occurred in years of negative total equity market returns. Missing those key days lowers long-term returns.4

For investors nearing or in retirement, consider a dynamic spending strategy to help manage the impact of market volatility. Specifically, it allows spending to fluctuate based on market performance while remaining sensitive to significant changes by setting a ceiling and floor for each year’s spending amount. Bear markets have, on average, occurred twice a decade, so most investors in retirement will experience several. Implementing a dynamic spending strategy will help improve the likelihood of not running out of money in retirement despite inevitable bear markets.

Finally, for active participants, continue contributing to your plan: If you do so with an allocation to stocks at a time when the market is down, you are essentially buying stocks on sale with more potential for price appreciation over long periods. 

1 U.S. stocks (CRSP U.S. Total Market Index), non-U.S. stocks (FTSE Global All-Cap ex-U.S. Index), U.S. bonds (Bloomberg U.S. Aggregate Float Adjusted Index), non-U.S. bonds hedged (Bloomberg Global Aggregate ex-U.S.D Float Adjusted RIC Capped Index hedged). Returns for these indexes as of June 30, 2022, are: –21.4%, –18.6%, –10.5%, and –10.0%, respectively.

2 Value (Russell 3000 Value Index) and growth (Russell 3000 Growth Index).

3 Sectors from CRSP Total Stock Market Index.

4 Vanguard calculations, based on data from Refinitiv using the Standard & Poor’s 500 Price Index daily returns.


  • All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss in a declining market. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
  • Investments in stocks and bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.
  • Bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.
  • Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. The Income Fund has a fixed investment allocation and is designed for investors who are already retired. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.