A review of the last two decades in investing
Robin Bowerman, Head of Corporate Affairs and Editor of Smart Investing, is retiring after almost 20 years with Vanguard. Here he reflects on the investment landscape over the last two decades.
.
Significant life events are often a useful catalyst for a deeper review of financial plans and investment portfolios.
So as your correspondent prepares to sign off and embrace life after a full-time career it seems like a good time to review the journey over the past two decades since Smart Investing began making its way into Vanguard investors’ inboxes.
December 2003 was when I climbed aboard the good ship Vanguard. John Howard was in the lodge and the Reserve Bank had just raised interest rates 0.25% - that has a familiar ring- with the cash rate then 5.25%.
Investing, as is life itself, is as much about the journey as the destination – and it has been quite the journey since 2003. While past performance is no guarantee of what the future will be like, it does present a good chance to test Vanguard’s investing principles against the real-world experience of the past two decades.
So how did the principles of …
- Set clear, appropriate investment goals
- Develop a suitable asset allocation
- Keep costs low
- Maintain perspective and long-term discipline
… stack up?
It has certainly been an interesting ride with four share market drops of more than 10% and two where the fall went past 20%. But global financial crises, a global pandemic and geopolitical events like war in Ukraine affected a lot more than just our investment portfolios.
Yet when looked at through the timeframe of two decades, the value of taking a long-term view is the lesson that really jumps out. Because as dramatic as the GFC and the COVID pandemic were, markets adapt and adjust. And as investors, we have to accept that somewhere in the future, other significant and largely unforeseen events await us.
The good news when you look at investment returns since December 2003 to November 2022 is investors have been rewarded for the risk they have taken on.
A growth portfolio (70% growth assets/30% defensive) saw $10,000 in December 2003 deliver a 7.4% return and grow to approximately $38,700. A conservative portfolio – which enjoyed a much more stable return path with a 5.8% return was worth approximately $29,100 at the end of the same period while a high growth portfolio (90% growth assets/10% defensive) delivered return of 8.2% and was worth approximately $44,500*.
One of the challenges of this type of analysis is that we naturally gravitate to the highest return at the end of the period. Hindsight is indeed a wonderful thing.
But accepting that we cannot predict the future it brings us to the Vanguard principles of setting appropriate goals and developing a suitable asset allocation that lines up with our personal goals and risk appetite
Since December 2003 the highest performing asset class was US shares thanks to a return of 10% which would have turned an initial $10,000 investment into approximately $60,800. Australian shares, by comparison, delivered 9.0% and a value of approximately $51,200 for the same time period*.
But when you chart the return journey – and you can do this yourself using the Vanguard interactive index chart tool – you can see the investor who had 100% of their portfolio in US or Australian shares had a dramatically more volatile journey than those who opted for a diversified portfolio.
If they could handle the volatility then they enjoyed the rewards but surely one of the lessons from the past two decades is that we all need to factor in risk as well as return.
It is one of the things that makes our superannuation system so good for working Australians. The typical default super fund portfolio has a diversified mix of assets – although some have higher risk levels than others so invest the time to understand your fund’s portfolio – and particularly as you approach retirement you may want to dial the risk exposure down. A feature that the new Vanguard Super fund has built in automatically.
Age is an important factor. For folks in their twenties or thirties a high exposure to growth assets makes sense. Much less so for a 65-year-old about to transition to life after full-time work.
If there is one learning that is an absolute constant from the past 20 years, it is the need for investors to keep costs as low as possible. As Vanguard’s founder Jack Bogle was fond of saying: in investing you get what you don’t pay for.
Finally, the principle of maintain perspective and long-term discipline can at times feel a little trite. But when you look back at events like the GFC or the outbreak of COVID you realise it takes real discipline to maintain the perspective and stay the long-term course.
Which is where the value of having a written financial plan shines through because it will remind you of why you were investing in the first place, the goals that are important to you and which investing success will enable you to realise.
After almost two decades Robin Bowerman is handing over the editorial reins of Smart Investing as he is retiring from Vanguard. However, guest columns are on the agenda for 2023.
Best wishes for the holiday season and Smart Investing will return in early 2023.
Robin Bowerman
Head of Corporate Affairs
vanguard.com.au
Latest Newsletters
Hot Issues
- Getting to a higher level of financial literacy in Australia
- What is the future of advice and how far off is superannuation 2.0?
- Investment and economic outlook, April 2024
- Australia’s debt service ratio ‘extraordinary’: CBA
- Connecting an adviser with your children
- ACCC scam report
- The Shortest-reigning Monarchs in History
- ATO warns trustees about increasing crypto scams
- Aged care report goes to the heart of Australia’s tax debate
- Removed super no longer protected from creditors: court
- ATO investigating 16.5k SMSFs over valuation compliance
- The 2025 Financial Year Tax & Super Changes You Need to Know!
- Investment and economic outlook, March 2024
- The compounding benefits from reinvesting dividends
- Three things to consider when switching your super
- Oldest Buildings in the World.
- Illegal access nets $637 million
- Trustee decisions are at their own discretion: expert
- Regular reviews and safekeeping of documents vital: expert
- Latest stats back up research into SMSF longevity and returns: educator
- Investment and economic outlook, February 2024
- Planning financially for a career break
- Could your SMSF do with more diversification?
- Countries producing the most solar power by gigawatt hours
- Labor tweaks stage 3 tax cuts to make room for ‘middle Australia’
- Quarterly reporting regime means communication now paramount: expert
- Plan now to take advantage of 5-year carry forward rule: expert
- Why investors are firmly focused on interest rates
- Super literacy low for cash-strapped
- Four timeless principles for investing success
- Investment and economic outlook, January 2024
Article archive
- January - March 2024
- October - December 2023
- July - September 2023
- April - June 2023
- January - March 2023
- October - December 2022
- July - September 2022
- April - June 2022
- January - March 2022
- October - December 2021
- July - September 2021
- April - June 2021
- January - March 2021
- October - December 2020
- July - September 2020
- April - June 2020
- January - March 2020
- October - December 2019
- July - September 2019
- April - June 2019
- January - March 2019
- October - December 2018
- July - September 2018
- April - June 2018
- January - March 2018
- October - December 2017
- July - September 2017
- April - June 2017
- January - March 2017
- October - December 2016
- July - September 2016
- April - June 2016
- January - March 2016
- October - December 2015
- July - September 2015
- April - June 2015
January - March 2023 archive
- China’s economic rebound lowers the odds of a global recession
- No plans to extend NALI compliance relief, says ATO
- Why most investors want human advice
- Comparison: How Long It Takes To Decompose?
- Contribution caps to stay the same for 2023–24 year
- Three simple steps for financial wellness
- Draft super objective to ‘protect super from interference’
- Beating back inflation, but at what cost?
- Why superannuation fund fees matter
- 100 Most Influential people in the world.
- TBC set for double indexation from 1 July
- ATO issues fresh warning on illegal early access schemes
- When to be proactive about your portfolio
- Digital advice firm optimistic QAR will ‘reset financial advice’
- 2022 by the numbers
- ATO raises alarm on asset protection scheme for SMSFs
- Downsizer age reduction now in force
- SMSFs cautioned on ‘strict conditions’ with SMSF lending
- Countries with the highest GDP per capita between 1800-2040
- Transitioning into retirement: What you should know
- Auditor flags surprising traps with e-signatures and SMSFs
- A review of the last two decades in investing