A reminder to investors to establish their risk tolerances, avoid the temptation to pick winners, allocate to a range of asset types and focus on the longer term.
To the average investor, 2020 was nothing short of confusing. While the global economy was devastated by the pandemic, stock markets rallied. The US S&P 500 index reached record highs as investors flocked to growth and technology stocks. Aided by exceptionally low-interest rates, government fiscal injections and rapid-fire vaccine development, most share markets recovered from the first quarter collapse to end the year in the black.
However, not all asset classes delivered the goods, as highlighted by Mercer’s ‘Periodic Table’ (the Table) of investment returns. Produced annually, the Table colour-codes 16 major asset classes and ranks how each performed on an annual basis over the last ten years.
A quick glance at the Table shows how one year’s winners can quickly become next year’s losers and vice versa. Predicting what may happen next poses a big challenge to even the most avid market followers.
Looking across 2020 and the past decade, a number of observations can be made from the Table:
For investors in diversified funds including KiwiSaver, a relatively narrow portfolio emphasising Shares and Bonds, with something of a domestic bias, proved hard to beat in 2020. However, it is too easy to conclude that simple is superior. With few asset classes standing out as obviously ‘cheap’ at present, the argument for wider diversification is perhaps as strong as ever. Exposure to non-traditional asset classes can serve to balance out the path of returns over time, so long as the risks are understood and access is attained on a cost-effective basis.
In sum, one can while away the hours making additional observations on the Periodic Table, and perhaps identify patterns. But are they real or illusory? The unpredictable nature of capital markets is unavoidable. The Table serves as a reminder to investors to establish their risk tolerances, avoid the temptation to pick winners, allocate to a range of asset types and focus on the longer term. In that way, there is a greater chance that periods of market disruption such as we saw in 2020 can be tolerated, rather than spark a panic reaction.
With a well-constructed portfolio in place, for all but the most skilled investors, the best advice during episodes of heightened volatility is often: Don’t just do something, stand there!
David Scobie is Head of Consulting NZ at global investment firm Mercer.
This article does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.
Principal, Institutional Wealth
David Scobie is a Principal in Mercer's Institutional Wealth business, based in Auckland. He is actively involved in assisting clients with their investment strategy, portfolio construction and implementation. David is also involved in evaluating fund managers, linking in with Mercer's research capability in Australia and globally.
Prior to joining Mercer in 2003, David gained six years of experience at the Reserve Bank of New Zealand where he was a portfolio manager with responsibility for trading US and European bond portfolios. David also worked in the asset and liability management branch of The Treasury as a senior analyst where he monitored the performance of crown financial institutions and companies, and provided strategic advice on a variety of commercial investments. span>