Holding onto a long-term investment was already hard enough before COVID-19 entered the picture.
However, experts at managed fund Vanguard have claimed that those who panicked and sold amid the losses of March 2020 likely lost out in the long run.
“The vast majority of investors who cashed out last year would have fared better on the whole if they had left their portfolios untouched,” said Balaji Gopal, head of personal investor at Vanguard.
As put by Mr Gopal, one of the biggest lessons that investors can learn from the pandemic is that relying on short-term market conditions to drive your financial strategy remains highly risky.
“On average, investors can expect to see one major attention-grabbing market downturn event every two years, testing an investor’s mettle to stick to a long-term strategy,” he explained.
Mr Gopal said that there are two big decisions that investors have to get right: when to exit and the market and when to re-enter it.
“Investment returns are largely determined by asset allocation and an investor’s resolve to stick to it, rather than by the timing of a trade,” he said.
Vanguard’s annual index chart tracks investment performance across a number of different asset classes and a hypothetical investment of $10,000 in 1991.
Vanguard’s most recent annual index chart found that Australian investors with a stake in the ASX who got cold feet in March 2020 were $55,843 worse off than those who held until June 2021.
Australian investors who dabbled in US stocks would have been even worse off, with potential losses of approximately $60,344.
The message from the managed fund is clear: those who chose to sit out after the early losses of the pandemic missed out on the rebound that followed.
Mr Gopal said that investors will have the best chance of investment success if they are adequately diversified across different asset classes and able to make investment decisions based on clear long-term financial goals, as opposed to market swings or commentary.
“Despite the peaks and troughs, average market returns will trend upwards over time,” he reminded investors.
As put by Vanguard in a report accompanying the fund’s latest index chart, “historical market returns show that those who ignore the emotional swirl of short-term market conditions and focus on the long-term are rewarded for their patience and discipline”.
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