Good things happened to finance investors who waited in 2020. But what a terrible expectation.
Mutual funds and exchange-traded funds of all types have generated solid annual returns, even better than normal. Consider the largest asset fund, a major holding of many 401 (k) accounts. Vanguard’s Total Stock Market Index fund returned 19.5% on December 22, more than double its average annual performance since 2000.
But early investors had to endure a 34% drop from February to March. Only by resisting the urge to sell and avoid the panic caused by the pandemic, would they have achieved that total return.
Many investors, unfortunately, did not have the resolution or the ability to endure this. Job losses, cash tightness and sheer fear have caused many investors to withdraw from the stock.
For most of this year, investors withdrew more money from US equity and ETF mutual funds than they did. It is a continuation of a trend for years, as investors constantly transfer money from equity funds to bond funds.
Bond funds, in turn, largely fulfilled their traditional roles as stabilizing forces for portfolios during stressful markets. They held up much better than equity funds in early 2020 and also produced substantial returns for the year. This is despite warnings in early 2020 that bond investors would likely have to accept weaker returns, given how low yields were.
The medium-term bond fund’s average returned 7.3% in 2020 through December 22, according to Morningstar. This is almost double your average annual return over the past decade.
But even within these stereotypically stable funds, investors had to endure several days of unbridled panic. The largest asset bond fund had a two-day extension, where it plunged 1.7% and then another 1.6%. Never had it fallen so much during the 2008-09 financial crisis or during the intermittent spikes in interest rates in the 1990s.
As in the case of actions, these great movements were also the product of fear. During the height of market liquidation, investors struggled to raise money in any way they could. In many cases, this meant selling high-quality bonds, because they were the easiest things to sell, which made their prices plummet.
When fears peaked in March, investors withdrew nearly $ 230 billion from taxable bond funds and ETFs, according to the Investment Company Institute.
Gold funds shone in 2020, while investors were looking for a safe place to hide from the turmoil.
Gold funds have a reputation for protecting against inflation, and the Federal Reserve has said it will allow inflation to go beyond its 2 percent target by trying to bust the economy. But investors still had to face strong sales in March to reap all the rewards. The biggest gold ETF had a week in March when it lost 9.1%.
Nothing in 2020 was easy, even if it turned out to be profitable. The best thing is that it’s finally over.