PART 16: Stay the Course

Vanguard’s founder, John Bogle, coined one of the most famous terms in the industry—and it was just three words: “Stay the course.” These three words encapsulate the entire mindset of success with investing. While at first glance this seems like a simple message to both understand and follow, under the microscope it proves to be far more challenging and insightful. I can think of no better message to impart in this final section of the FFWF Investing Guide, so let’s spend some time unpacking just what it means.

Trust in Your Plan

If you’ve been following the guide to this point, you’ve put in the work. You’ve built an emergency fund, knocked down high-interest debt, taken the time to learn about investments and the market, established your asset allocation, planned your portfolio, and set that plan in motion. You also know how to maintain your portfolio going forward—tracking it, and rebalancing when necessary. All of this to say: your plan is solid. In taking these steps, you’ve made sure that your portfolio is “all-weather,” and not just “fair-weather.” This should bring you some measure of confidence.

But here’s the reality: just because your portfolio is “all-weather” does not mean that you are. Once you’ve established your plan and put it into motion, everything from this point depends on your ability to see it through. And (staying with the metaphor for a moment) depending on the weather, you are likely to find this easier on those sunny days than you will when an apparent hurricane is bearing down on you. You will be tested when the market gets volatile. You will contend with your own psychology and emotions, and how you react to these conditions will determine your level of success.

“Don’t do something, stand there!”

Lucky for us, Bogle also had advice for exactly how to handle market volatility. He was interviewed by CNBC in August 2011—when the Great Recession was well into its fourth year—and was asked what advice he had for investors in the current market. His response? “My rule—and it’s good only about 99% of the time, so I have to be careful here—when these crises come along, the best rule you can possibly follow is not, ‘Don’t stand there, do something,’ but ‘Don’t do something, stand there!'”

Don’t do something, stand there.

This is not easy to do. No matter who you are—and no matter how solid your plan is—market crashes are scary. Bogle referred to them as the “times that try investors’ souls.” And they can last for years. During the Dot Com Bubble (2000-2002), the S&P 500 fell from 1,517 in July 2000 to 815 in August 2002, a loss of 46%; the S&P didn’t recover its previous valuation until April 2007—almost 7 years later.

A mere five months later, the Great Recession (2007-2009) was not much different. The S&P fell from 1,549 in September 2007 to 735 in February 2009, a loss of 52%. It didn’t recover its previous valuation until March 2013—over 5 years later.

Try for a moment to imagine what those years were like. Both crashes were tied to different causation events, which means that both felt like (and in a sense, were) entirely uncharted territory. With that comes a certain level of fear, because it brings with it a corresponding thought: What if, this time, the market doesn’t recover? This thought occurs repeatedly, and during a time when you are watching your portfolio drop 20%, then 30%, then 40%…and on, with no end in sight. Depending on your portfolio, this might mean tens of thousands of dollars, hundreds of thousands, maybe even millions. This during a time when you look around, and see your own fear reflected everywhere: your friends are selling their shares to “stop the bleeding,” advising you to do the same; pundits on TV are calling the economy a “sinking ship”; headlines in the financial papers have doomsday appearing in bold print nearly every day.

No one is immune to this. JL Collins, one of the most brilliant financial minds of our era, tells a very candid story in The Simple Path to Wealth about his personal experience during the stock market crash of 1987. To put a little context behind it, this particular crash was rapid and severe. On October 19, 1987—a day now known as “Black Monday”—the S&P dropped 20.4% in a single day. It was the greatest one-day loss ever seen on Wall Street. And Mr. Collins’ experience is both sobering and entirely relatable.

It is hard to describe just what this was like. Not even the Great Depression had seen a day like this one. Nor have we since. Truly, it looked like the end of the financial world…I knew that the best course was to hold firm and not panic. But this? This was a whole ‘nother frame of reference. I held tight for three or four months. Stocks continued to drift ever lower. I knew this was normal, but unfortunately I knew it only on an intellectual level. I hadn’t yet learned it deep enough in my gut. Finally, I lost my nerve and sold…That day when I sold it was, if not the absolute bottom, close enough to it as not to matter. Then, of course and as always, the market again began its inevitable climb. The market always goes up. It took a year or so for me to regain my nerve and get back in. By then it had passed its pre-Black Monday high. I had managed to lock in my losses and pay a premium for a seat back at the table. It was expensive. It was stupid. It was an embarrassing failure of nerve. I just wasn’t tough enough. But I am now. My mistake of ’87 taught me exactly how to weather all the future storms that came rolling in, including the Class 5 financial hurricane of 2008. It taught me to be tough and ultimately it made me far more money than the admittedly expensive education cost.

JL Collins, The Simple Path to Wealth

Can anyone truly say that they would not fold to the same thoughts, the same fears, the same pressures under these circumstances? I certainly can’t. If a legend like Collins has the humility to look back and say, “I just wasn’t tough enough,” well…the likes of you and I should probably listen. But it’s important to understand: I don’t bring any of this up to scare you. I do it so that you will be prepared. I do it so that you will understand this critical point: This is what the market does. This is normal. And it always feels like the end of the world.

So, you say, I’m supposed to go through something like this and do…nothing? Yes. But let’s step away from the doom and gloom for a moment. Here’s how I like to picture the challenge of staying the course through a market crash. Have you ever seen those videos of tourists annoying the Queen’s Guard at Buckingham Palace? If you haven’t, let me quickly paint a picture. The Queen’s Guard, stationed outside Buckingham Palace in London, are well-known for their high levels of discipline and restraint. And because of this, it’s become something of a sport for particularly annoying tourists to try to get them to break composure and react. Picture something like this…

This, as it happens, is a perfect analogy for what it’s like to stay the course in the face of market volatility. In effect, you are the Queen’s Guard facing down the annoying tourist (the noise of the market). Every once in a while, in the course of investing, some fool will walk up to you, start yelling, flapping his arms, gesticulating wildly. And when this happens, you have a choice:

  1. React—and lose, or
  2. Stand still—and be better for it.

Some fools are louder, some will even take a swing, some will come in the guise of friends or family, some will stay around for months or even years at a time. But all will go away eventually. Your job is to ignore them.

Emotions Will Crash the Car

Because here’s the thing to remember: reacting emotionally guarantees that your emotions are in the driver’s seat. And trust me: that’s where you don’t want them. With investing, most of the people who put emotions in the driver’s seat end up crashing the car at some point. Those who never even let emotions get in the car reach their destination. Remember JL Collins’ cautionary tale to us all? Remember his buy and sell decisions during the crash of 1987? He sold when the market was near the absolute bottom, and only got back in once his confidence (and the market) had recovered. He sold low and bought high. He may not have crashed the car outright, but he certainly dented the fender. And he’s far from alone.

DALBAR, a leading financial services research firm, has issued a yearly report since 1994 called the Quantitative Analysis of Investor Behavior. We’ll just use the acronym QAIB and call it good. The QAIB has the stated objective of “[measuring] the effects of investor decisions to buy, sell and switch into and out of mutual funds over short and long-term timeframes. These effects are measured from the perspective of the investor and do not represent the performance of the investments themselves.” In other words, the QAIB is a very useful lens through which we can see how investor behavior affects investor performance.

And the results are eye-opening. According to the 2020 QAIB Report, the “Average Equity Fund Investor earned a return of 26.14% in 2019, 5.35% lower than the S&P 500 return of 31.49%.” And, as you can see from the following chart, this trend of underperformance persists no matter the timeframe we evaluate.

Source: DALBAR, 2020 QAIB Report

After 3 years, the average equity fund investor has underperformed the benchmark (S&P 500) by 3.77%; after 10 years, that underperformance is 4.13%; by the time we reach 30 years, that underperformance has been a persistent 4.92%. Said another way, after 30 years, the average equity fund investor had lost out on almost 50% of the return they could have gotten by simply buying and holding the S&P 500.

Of course, the big question here is: why? What did the average equity fund investor do to lose nearly 50% of their return potential? The answer, as it turns out, is behavioral. They reacted to their emotions during volatility, believed that they were capable of timing the market, or both. The report states:

“One major reason that investor returns are considerably lower than index returns has been the fact that many investors withdraw their investments during periods of market crises. Since 1984, approximately 70% of this underperformance occurred during only ten key periods. All of these massive withdrawals took place after a severe market decline…Of the 10 most severe cases of underperformance: 8 cases would have produced better returns for the Average Investor one year later if they had taken no action and held on to their investments…historical evidence is overwhelming that “Take No Action” is most often the best course.”

Source: DALBAR, 2020 QAIB Report

Said another way, the majority of the underperformance noted over the 36 years evaluated occurred during just 10 periods of time. And for 80% of the most severe of these cases, the actions taken by investors during these periods of volatility actively harmed their return potential. It wasn’t the fluctuations of the market that damaged their portfolios most; it was their own behavior. They would have been better off staying the course and taking no action in response to volatility. They would have been better off ignoring the yelling tourist. DALBAR goes on to explain:

“Investor behavior is not simply buying and selling at the wrong time, it is the psychological traps, triggers and misconceptions that cause investors to act irrationally. That irrationality leads to buying and selling at the wrong time, which leads to underperformance.”

Source: DALBAR, 2020 QAIB Report

Staying the Course 101

So…how exactly does anyone stay the course? There are some key points that I believe are helpful here. First, as I said at the beginning of the post, you should have confidence in your portfolio and your plan. If you’ve been following the FFWF Investing Guide, you’ve done a lot to ensure that your portfolio is “all-weather.” Your portfolio structure has historically carried investors through a myriad of different markets, and the strategy behind it is sound.

Second, as I mentioned before, the market gets rowdy at times. It’s just what it does. This is entirely normal. Peter Mallouk notes in his book The Path: Accelerating Your Journey to Financial Freedom that stock market corrections (a drop of 10% or more) occur approximately every year on average. When a correction exceeds a 20% drop, it becomes a bear market. These happen on average every 3-5 years, and most last between 8 and 24 months. You can expect to run into many corrections and more than a few bears in your investment lifetime. Don’t let them take you by surprise.

Equally important: the market always recovers, and eventually resumes its slope upwards. Morgan Housel (author of The Psychology of Money) puts this succinctly when he writes, “You can be optimistic that the long-term growth trajectory is up and to the right, but equally sure that the road between now and then is filled with landmines, and always will be. Those two things are not mutually exclusive.”

Third, it can be helpful during times of volatility to zoom out; during market crashes, we all have the tendency to not see the forest for the falling trees. Consider the 1987 stock market crash that we talked about above. You know, the one where the market dropped 20.4% on Black Monday, and felt like the end of the financial world? Here’s how it looked at the time.

Source: WSJ Charts

Now let’s zoom out a bit—the past 44 years, to be exact. Can you spot the 1987 crash? Yep, it’s right…there. Doesn’t look exactly end-of-the-world-ish from this vantage point though, does it? The market shrugged it off and said, “onwards and upwards.” As it always does.

Source: WSJ Charts

Fourth, I think it’s helpful to look at exactly what you’re doing by staying the course. If you have an investment plan where you’re making automatic, set contributions, you are essentially using a strategy referred to as dollar cost averaging. What this means is that you are putting your money into the market in regular, fixed amounts regardless of what is going on in the market. That last bit is key. For most investors, this takes the form of regular payroll contributions, or setting up automatic contributions on your own into an IRA (monthly, weekly, and so on).

Here’s why this is important. Because your investing is done regardless of what the market is doing, this means that sometimes you will capture higher prices (when the market is up), and sometimes you will capture lower prices (when the market is down). In times of market volatility, where the market can be down for months or even years, this means you are essentially purchasing shares at a discount. Because your investing dollars go farther, you are thereby purchasing more shares—and over time, this can make a significant impact when the market eventually does rebound.

Think of it this way. Buying shares in a down or sideways market can feel like you’re standing still—or even moving backwards. It’s not. You’re storing kinetic energy. When the market rebounds, you’re a slingshot.

Fifth, as I mentioned previously, during down markets you will see and hear a LOT of noise coming from various media or social media channels. Here’s the thing to keep in mind: these outlets prioritize sensationalism (and ratings) above everything else, and the majority of the commentary you are exposed to will revolve around this. Another thing to keep in mind is that no one—absolutely no one—can tell you what the market will do next. So-called “experts” will certainly try, and you will hear plenty of economic predictions. Here’s the problem: as writer Mike Piper notes, “All day long everyday, there’s news being released that makes people either more or less confident in our economy. There’s a functionally infinite amount of information involved, far more than anybody—or even any computer program—could keep track of.” Market timing is akin to standing in a dark auditorium with a candle and claiming that you can see everything with full clarity. It’s important to remember that all of this commentary and all these predictions are just noise—tune it out. Treat it just like any other annoying tourist.

Market timing is akin to standing in a dark auditorium with a candle and claiming that you can see everything with full clarity.

Finally, if you are still not feeling confident about your ability to stay the course, that’s okay. This is actually a very important insight about your psychology and risk tolerance. If you are feeling this way, I would strongly encourage you to go back to Parts 9 and 10 and revisit your asset allocation. Making sure that your asset allocation plan is created within view of your psychology is absolutely vital.

Further Reading

A final point: one of the absolute best bulwarks against emotion and impulsiveness is knowledge. If you understand how the markets work—and how your portfolio will move within them—you will be much less likely to react when volatility hits. To that end, I would strongly recommend picking up these three books. Taken together, they will give your knowledge base the strongest foundation possible.

“The Little Book of Common Sense Investing” by John Bogle

This is the book that started it all for me; to call it “life-changing” is no overstatement. Written by John Bogle, the creator of the index fund (for individual investors) and founder of Vanguard, this small book does more to explain the index investing philosophy and break down the stock market better than any other book I’ve ever read. I’ve committed to reading this once per year, and every time, I seem to pick up something more from it.


“The Simple Path to Wealth” by JL Collins

It is impossible to overstate how much JL Collins has done to help people get started down the road to financial literacy. Ask any investor for their personal recommendation on where to start, and there’s a good chance this book will be the first they mention. There is a reason for that. The Simple Path to Wealth is accessible, comprehensive, and packed with knowledge and insight for both beginners and experienced investors alike.


“The Psychology of Money” by Morgan Housel

This book is a masterpiece. As a reader of FFWF, you will know how much I believe that the right mindset is critical. Morgan Housel has written a book that not only explores the psychology behind finance, but fits it into the context of the markets and history itself. The most astounding thing is that no matter who you are, no matter what you’ve been through, no matter your foundational beliefs about money, he manages to meet you right where you are. Then he takes hold of the shades, and throws them wide open.


To wrap up, let’s bring it full circle. John Bogle had this to say in one of his books, and I could not agree with him more: “Stay the course. No matter what happens, stick to your program. I’ve said, ‘Stay the course’ a thousand times, and I meant it every time. It’s the most important single piece of investment wisdom I can give you.”

You won’t be alone on the road. The great thing about the personal finance community is that you will find tens of thousands of others out there on the same journey, and most are able and willing to help others find their way. After all, while we have different variables, we have the same destination: financial independence. If you’re looking for a place to get started, check out Fight Fire With FIRE on Facebook. There are also many other fantastic Facebook groups out there that you can find by searching “FIRE” or “Vanguard.” You’ll also find a vibrant community on Twitter and some of the most knowledgeable people I’ve ever met on the Bogleheads forums. If you see me out there, be sure to say hi.

Thanks for reading! It’s my hope that the FFWF Investing Guide has been helpful in getting you started. I just have one ask. If it has helped you, let me know! You can reach me via the feedback form on the site, or at my personal email (ffwithfire@hotmail.com).

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