Vanguard 2016 Index Chart highlights value of long-term perspective
Vanguard | 03 August 2016
Recent volatility may have rattled markets around the globe, but 30 years of index data shows that looking beyond the short term can have its rewards.
The newly-released Vanguard 2016 Index Chart tracks 30 years of performance across major asset classes to demonstrate the power of compounding returns over a long term period. Data to the end of the 2015/16 financial year puts losses amid the Global Financial Crisis from 2008, the Tech Wreck from 2000 and the short term reaction to the UK 'Brexit' vote in late June into perspective.
From peak to trough during recent volatility surrounding the Brexit vote, the MSCI World ex-Australia index fell 4.44 per cent, compared to an annual gain of seven per cent on average for the index over 30 years.
By comparison, the Global Financial Crisis saw the S&P/ASX 300 fall by 50.26 per cent, and the Tech Wreck in 2000-2003 saw the US S&P 500 fall 50.37 per cent, as examples of how other significant market events have played out.
Vanguard Australia Head of Market Strategy, Robin Bowerman, said the global media headlines and commentary around Brexit would have been difficult for investors to ignore, but keeping a long term view was essential to achieving investment goals.
"We have been in a fragile market environment since the second half of 2015, and the recent volatility surrounding Brexit generated a lot of market noise. That can be hugely distracting for investors, who are generally better served by sticking to long term, goal-oriented asset allocations rather than making decisions that are reactive to market movements," Mr Bowerman said.
"The recent referendum vote in the UK may prove to have medium to longer term implications for the European economy and global markets, and no doubt more evidence of those effects will emerge as negotiations around the issue unfold. Although we can expect some further ups-and-downs on the road ahead, the relatively rapid stabilisation of many markets after the initial Brexit news highlights the value of resisting the urge to be spontaneous when market shocks occur.
"The key thing is to focus on how asset classes will perform over your investment time horizon, whether that's five, 10, 20 years or even longer. There's a lot of commentary about an extended environment of low returns, but Vanguard's view, while guarded, is not bearish and we believe that diversified and patient investors are likely to be rewarded."
The chart shows how key asset classes performed over 30 years based on a $10,000 investment made in 1986, with returns reinvested. Over that time, Australian shares grew to $154,405, returning 9.6 per cent on average each year. By comparison, $10,000 invested in Australian bonds grew to $128,829, while cash grew to $75,023.
"The index chart not only teaches the power of compounding returns over a long period of time, but also the value of a diversified portfolio," Mr Bowerman said.
"We can see that, over time, each of these key asset classes has grown despite ups-and-downs along the way. So when investors read commentary saying certain asset classes are out of favour, they should remember that diversifying risk is an important part of constructing their portfolio.
"Diversifying across multiple asset classes allows investors to take advantage of growth on several fronts, while providing some safe harbors against unexpected risks and market corrections."
Vanguard makes an annually updated index performance chart available to financial advisers and individual investors each year. An interactive version is also available online, with data updated monthly.
The Vanguard Index Chart has a long history as an educational resource that advisers use to assist clients in demonstrating the long-term performance of key indices and showing the value of a long term, diversified investment strategy with indexing at its core.
Vanguard has produced index charts available to the industry for 16 years.
To view the Vanguard 2016 Index Chart Online, visit vanguard.com.au/indexchart