OPINION: The human and economic cost of the Covid-19 pandemic through 2020 was unprecedented. There’s simply nothing quite like it in recent history, and the same has also been true of investing through 2020.
When the far-reaching human and economic impact from the pandemic became obvious, markets reacted badly. The March 2020 fall in global stock markets was unmatched in terms of size and speed.
We all saw this impact in our KiwiSaver balances, and many deeply concerned investors felt forced to act. A large number did exactly what turned out to be the worst move possible and switched from a growth KiwiSaver fund into a conservative fund. That move simply locked in losses.
In an even more unprecedented response, global equity markets quickly rallied back and closed 2020 near all-time highs.
At the start of 2020 almost nobody predicted the Covid-19 induced fall in markets. In March 2020 even fewer people predicted the powerful rally back from the lows.
There are powerful lessons for investors from this. Firstly, know what your investment objectives are and make sure your investment choices reflect them. Secondly, if you have a long-term investment horizon, for example saving for retirement, then stay the course. Don’t panic just because markets go down. Invariably they will return, although admittedly not always as quickly as in 2020.
History tells us that investors with a long-term horizon will ultimately have a profitable experience. If we look at global sharemarkets since 1969, there have been very few long-term periods where your return would have been negative.
For instance, let’s take the experience a simple, passive investor would have had in global shares as measured by the MSCI World Equity Index. If we measure rolling 10-year periods starting every month since 1969, then there have been 480 such periods.
This data tells us a lot as a long-term investor. Of those possible 480 ten-year investment periods, less than 10 per cent lost money over the 10 years. The average ten-year return was a healthy 10.7 per cent per annum.
Expand your investment horizon to 20 years, and returns become even more compelling. Now every return period was positive, with the worst being 2.3 per cent per annum. The overall average was 10.2 per cent per annum, not bad at all.
Obviously, past experience won’t always be a reliable guide for the future, but there is no reason to believe that the mechanisms driving markets – individual companies innovating, consumers demanding better products – will change. Equity markets will still be the place to go to create value and wealth.
2020 will be remembered for all the wrong reasons, but there is one lesson all investors should take note of. Do not panic when markets fall. Invariably they will recover. If your personal investment time horizon is long enough, then stay the course. Make sure you are in the right fund with the right risk level, then you will not succumb to the impulsive need to switch at the wrong time.
If markets do fall, the easiest way to create superior returns is by actively investing more when markets are low. This is counter-intuitive but proven to deliver.
Choosing an active investment manager is one way to do this, as well, you can contribute more to your KiwiSaver when markets fall. As many smart investors in the past have said, the best time to buy is when everybody else is selling.
Paul Brownsey is co-founder of ethical investment manager Pathfinder Asset Management, and ethical KiwiSaver provider CareSaver. For 2020 Pathfinder was named Responsible Investment Manager of the Year by Goodreturns/Research IP and Social Impactor of the Year by the Sustainable Business Network.