Vanguard plugs value of the index

Sticking with its strong suit, Vanguard has plugged the value of index investing with the launch of its 22^nd Index Chart plotting the performance of major asset class over the last 30 years.

And the bottom line, according to Vanguard, is that despite significant downturns, markets typically trend up over time and that over the past 30 years Australian shares have on averaged returned 9.2% a year despite major market events such as Russia’s invasion of Ukraine, COVID-19 and the global financial crisis (GFC).

The Vanguard analysis also points to the fact that Australian shares returned 14.8% this financial year – a significant improvement over the previous financial year when the same asset class returned minus 7.4%.

It said that all other asset classes in FY23 also saw positive returns, a reversal since FY22 when all returns were in negative territory with the best performing asset class this year being US shares, returning 23.5% in the period between 1 July 2022 to 30 June 2023 compared to minus 2.4% a year earlier.

Australian bonds also made a notable recovery, recording 1.2% this year compared to -10.5% in FY22.

Conversely, cash was the best performing asset class last year with 0.1%. This year, cash was the second lowest returning asset class with 2.9%.

Commenting on the data, Vanguard Australia head of Financial Adviser Services, Balaji Gopal said the annual Index Chart put into perspective the importance of approaching investing with a long-term mindset.

“While investors shouldn’t rely on past performance, 30 years of market history has proved that the impact of geopolitical, economic and social events on performance is usually short-lived, and markets will typically recover and rise over time,” he said.

“Looking back over the last few decades, bear markets on average last only 0.9 years and are generally followed by a bull market, averaging 6.5 years. Investors who stay invested through downturns are therefore best poised to benefit when markets inevitably bounce back”.

“Although volatility smooths out in the long run, markets are unpredictable in the short run. The best performing asset class one year is not guaranteed to be the best the following year, and vice versa.

“Take bonds for example – last year, fixed income markets were caught in a perfect storm of surging inflation, rate hikes, and an unusual correlation with equities. This year however, return expectations for bonds have significantly improved, and yields and spreads have stabilised. Investors are again realising the diversification and income benefits bonds can provide as they begin to bounce back.

“This is why diversifying across asset classes – and making sure you have both growth (such as equities) and defensive components (such as bonds) in a portfolio – is the most effective way to mitigate market uncertainty”.