What is data telling us about returns in 2020?

It was a rough year in many investment markets last year. However, for diversified investors, 2020 turned out better than many feared when the pandemic first hit.

What is the data telling us so far?

Data on 2020 is starting to paint a fuller picture of the year that was for investors. So far, average balanced growth superannuation funds looking like they have returned around 3%. This followed around 15% in 2019. Further, balanced growth super funds returns have averaged around 7% p.a. over the last five years, which is of course well above inflation and bank deposit returns.

What helped markets along?

There were a variety of factors we can point to that helped markets begin their recovery. Many of them are proof of something that can be hard to see when everything is flashing red; markets have a way of finding their feet, even in the midst of major disruptions.

Chief among these factors was the massive fiscal support we saw from governments worldwide, which helped support businesses, jobs and incomes. We also saw massive monetary stimulus and a drop in interest rates, helping borrowers service their loans. Economies also found ways to reopen once containing the virus, albeit more successful in some regions (such as the Asia Pacific) than others. Other big factors include good news on vaccine trials and effectiveness, as well as the election of US President Joe Biden, who offered the prospect of more certainty and less tensions with trading partners.

So, what can we learn?

With 2020 now in hindsight, and the results of the year starting to come in, a few tried-and-tested lessons ring true for me. They include:

1. Timing market moves is hard.
   Just as getting out at the share market top in February was hard, getting on board again for the rally from March was even harder given the gloom at the time.
2. Don’t fight the Fed, ECB, PBOC or RBA.
   While they could not prevent the plunge in share markets into March, massive money easing by global central banks was a key driver of the recovery.
3. Investment valuations need to be assessed relative to interest rates.
   While PEs may be high, once the dust settles in terms of the economic outlook, what matters is the yield offered by shares relative to interest rates. And low rates make shares relatively attractive.
4. Depressions can be avoided.
   2020 showed that a rapid, large and well targeted economic policy response can protect an economy from a significant shock and enable it to rebound quickly when the threat abates. This is good reason for investors not to panic in the face of economic shocks.
5. Turn down the noise.
   Investors were bombarded with information and opinions around what the coronavirus would mean but much of this was just noise. The key is to turn down the noise and stick to a long-term investment strategy.

We aren’t out of the woods yet with COVID-19, far from it. But I think it’s important to keep in mind the actual and potential positives where we can in times of uncertainty, especially if they can help frame decisions for the long-term.

You can read more on this topic from Shane Oliver here.