How to invest in this market sell-off, according to a top fund that’s survived every crash since 1929

• When investors get antsy, managers of the 96-year-old Vanguard Wellington Fund strike.
• Sell-offs can put quality stocks on sale for dubious reasons.
• Here’s the part of the market that a top-performing investor is targeting now.

In the last 96 years, the Vanguard Wellington Fund (VWELX) has been through it all.

Three months after its inception, what’s now the third-longest-active mutual fund got rocked by the Wall Street crash of 1929, which effectively marked the start of the Great Depression. And in the decades after that disaster, it faced a litany of wars, recessions, and the financial crisis.

Needless to say, portfolio managers Loren Moran and Daniel Pozen are undaunted by this latest stock-market correction. They’re confident in their time-tested investing strategy, which has lifted the $113 billion fund past 92% of its competitors in the last 15 years, according to Morningstar.

However, while many bottom-up investors simply block out the noise, Moran and Pozen think a tunnel-vision approach to investing is misguided. Instead, they go on the hunt during selloffs.

“Where there’s volatility, and there may be perceived weaknesses in companies that we disagree with, it certainly is a good hunting ground in terms of finding ideas and an opportunity to add alpha as well,” Moran said in a recent interview.

Fear can lead to flash sales

Being opportunistic doesn’t mean becoming a day trader. Pozen stressed to Business Insider the importance of patience and maintaining a long-term perspective. He said he’s focused on how his investments and fund fare over several years instead of sweating quarterly swings.

Investors have been anxious about a lot lately. US stocks have gotten slammed in the last month as President Donald Trump’s tariffs on key trade partners raise the risk of trade wars that may cause either a recession or stagflation, which is marked by weak growth and higher prices. Add in the market’s elevated valuation, and it’s clear why many are cutting equity exposure.

In this momentum-driven market, these headlines can cause people to jump to conclusions, Moran said. So while it’s smart to stay attuned to what’s happening, she and Pozen are wary of overreacting to any narrative, including that economic growth is increasingly likely to fall flat.

Successful stock selection is what separates mutual funds from the pack, and Pozen said choosing quality companies at a discount becomes much easier during down markets.

“Cyclical companies that are perceived to have lots of exposure to that environment — if they’re sold off as a result, then we will look at that company and see to what extent the stock price reflects too negative an outlook or skew, in terms of the range of outcomes for the business,” Pozen said.

In other words, when investors race to one side of the metaphorical boat — whether it’s by chasing the same stocks or sectors — Pozen is comfortable with taking the other side.

That said, a quick glance at the Vanguard Wellington Fund shows that its five largest holdings are all mega-cap growth stocks: Microsoft, Nvidia, Apple, Alphabet, and Amazon. Pozen said that he had to have some exposure to those names to keep pace with the S&P 500, as is his mandate. Going forward, he said he doubts they’ll keep rising as much as they have.

“It is an objective fact that seven stocks have been the primary driver of the whole market’s returns over the last number of years,” Pozen said of the so-called Magnificent Seven stocks. “Now, there is a reasonable case to be made that the path forward for these companies will be more divergent than it has been in the past.”

However, Pozen and Moran adhering to their fund’s strategy is different from following the crowd. A few years ago, the classic 60-40 stock-bond portfolio came under immense pressure, leading some to write obituaries for that once-widely accepted investing strategy.

But the fund managers held to their 65-35 stock-bond split, in part because Moran noted that her predecessors made a mistake 50 years ago by bending to asset allocation shifts instead of holding fast and trusting the fund’s decades-long track record.

“There was a slight move in the early ’70s where the asset allocation shifted more towards stocks, and that was actually a period of much more challenging equity returns as well,” Moran said. “And so the shareholders really did not benefit from that more aggressive equity-fixed income mix.”

Studying prior selloffs can yield lessons about the present, the fund managers said, and they hope to capitalize on that knowledge now.

Take it to the banks

When asked where investors should put fresh money to work, Pozen had a clear answer: large-cap banks. He also specifically highlighted Wells Fargo (WFC), which is his largest position on a relative basis, after the mega-cap stocks he needs to keep pace with the index. And it’s a few spots ahead of financial giant JPMorgan (JPM), which fits this thesis he outlined.

Since the financial crisis, the financial sector has been under tremendous regulatory pressure, and banks have borne the brunt of that scrutiny, Pozen said.

“The regulators have really put their thumb on the scale,” Pozen said, noting the liquidity ratios and capital requirements large banks had to comply with. “And that has resulted in suppressing returns on equity and growth rates for the sector with good positive outcomes, which are soundness and safety of the sector and economic stability.”

That overhang is likely to either lift or be lessened during Trump’s second term, Pozen noted. He remarked that regulatory pressure “may or may not get better, but it’s at least plateauing.”

In response, Pozen loves large banks that are well capitalized and have the scale and technology investments necessary to take even more market share and ward off fintech rivals.

Plus, valuations for many financial firms are dirt-cheap relative to the broader market, especially in Wells Fargo’s case. The San Francisco-based bank took tons of heat in the late 2010s for its risk management and sales practices.

However, Pozen is confident in CEO Charlie Scharf’s leadership in recent years, and the stock has responded accordingly, with shares up 46% since the start of 2024 after a yearslong slump. He’s looking forward to seeing what Wells Fargo can do once it’s unburdened by excess liquidity and heightened operational costs that come with the regulatory scrutiny it’s faced.

“As you see regulatory pressure ease for the industry — doubly or triply true for the company — it should be a great opportunity for Wells Fargo to finally realize the potential of the brand and the potential of the business as they get out from some of those pressures,” Pozen said.