Staying the course pays off during downturn

Investors who stayed the course and resisted the urge to sell during last year’s coronavirus-induced sharemarket crash have well and truly reaped the rewards of the stellar rebound.

Australian shares fell by as much as 40 per cent in February and March of last year as investors dumped equities and factored in worst-case COVID-19 scenarios.

The benchmark S&P/ASX 200 Index of the top 200 companies listed on the Australian Securities Exchange dropped from about 7100 points to a low of about 4800.

However, shares have staged a stellar comeback and the benchmark last week hit a record high of more than 7600 points, spurred on by big gains for banks and miners.

Since the low of March last year, share prices have soared about 60 per cent, as investors bet on the arrival of vaccines to put an end to lockdowns, allowing the resumption of the nation’s strong economic growth of the past three decades.

Of the companies that have reported their profits so far during the latest reporting season, which began two weeks ago, many have announced special dividends or share buybacks.

Craig James, chief economist at CommSec, says of the 27 companies in the S&P/ASX 200 that reported full or half-year earnings by the end of last week, $17.7 billion would be returned to shareholders, up from $6 billion a year earlier.

“Aussie companies are cashed up and keen to reward shareholders,” James says.

Of the 21 companies among the S&P/ASX 200 that reported full-year earnings for the year to June, aggregate revenues fell about 4 per cent; expenses fell 5 per cent; net profit rose 32 per cent; dividends lifted 66 per cent and cash holdings rose by 152 per cent.

Balaji Gopal, fund manager Vanguard’s head of personal investor, says the vast majority of investors who cashed out of the sharemarket last year would have fared much better if they had left their portfolios untouched and ridden out the COVID-19 storm.

“History shows, despite the peaks and troughs, average market returns still trend upwards over time,” he says.

Gopal says investment returns are largely determined by asset allocation and an investor’s resolve to stick to it, rather than by trying to time the market.

He says successful market timing requires investors to get two key decisions correct: when to sell and when to buy back into the sharemarket.

However, the best chance of investment success is to diversify across various asset classes and to continue to make investment decisions based on long-term financial goals, rather than market swings, he says.

It was not only share investors who sold that missed out. Those who switched from their “balanced” superannuation investment option into their fund’s “cash” option, or into another lower-risk, diversified alternative, would also have missed out on the sharemarket’s rebound.

The typical “balanced” super investment option has about half of its pooled funds invested in shares. Those who switched to cash and more conservative super options after share prices started to fall, locked in their losses.

SuperRatings’ figures show the median return over the year to June 30 for “balanced” super fund options, where most people who are still working have their retirement savings, was a stellar 17.6 per cent.

The Australian Prudential Regulation Authority revealed last year that super fund members had switched billions of dollars to cash and conservative options when shares prices were in freefall.

The regulator said: “Some members may have timed the market well and preserved their retirement balances ... but many more are likely to have switched at the wrong time and switched back after markets were already in recovery.”

Vanguard’s Gopal says: “One of the biggest investment lessons learned from the pandemic [so far] is that markets are truly unpredictable, and letting short-term market conditions drive investment decisions is highly risky.”

“On average, investors can expect to see one major attention-grabbing market downturn every two years, testing an investor’s mettle to stick to a long-term strategy,” Gopal says.