New research confirms that, for the zillionth time, it’s important to take the long view and put recent market losses in perspective.
Investing behemoth Vanguard notes that “U.S. markets reached a peak on February 19, 2020, fell 34% in late March, and then rose 16% through the end of the month. For the quarter ended March 31, 2020, the S&P 500 returned –19.6%.”
But widening the time frame to look at investor performance over the last three years finds more than three-quarters increased their wealth.
Defined contribution plan participants specifically saw recent wealth declines of 14%—which is a figure nearly identical to the return of a 70% stock/30% bond benchmark portfolio during that time.
“As expected, wealth changes varied with underlying equity allocations,” according to the report. “We measured those allocations as of December 31, 2019. DC households with zero equity had, surprisingly, essentially no change in wealth.”
At the other extreme, it adds both DC and retail investors with all-equity allocations had wealth declines of 20%—a figure nearly identical to the return of the S&P 500 Index.
Widening the lens
“When we widened the study’s time frame to three years, nearly all investors saw increases in wealth. A hypothetical 70/30 balanced portfolio would have grown by 12.4% over the three-year period ended March 31, 2020.”
Retail households’ wealth rose 12%, similar to the return of a 70/30 balanced portfolio. DC investors had higher increases because most received ongoing employee and employer contributions, and wealth generally climbed along with allocations to equities.
“These figures suggest that investors should take a long view in thinking about market shocks and portfolio wealth,” the report concludes. “Widening the time frame can provide the psychological peace of mind necessary to avoid overreacting to short-term market declines, including those associated with the current pandemic.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
