The outbreak of COVID-19 continues to be an unprecedented tragedy across the globe. While the challenges for investors have paled in comparison to those more directly impacted by the virus, we have sought to provide an overview of what has and hasn’t worked within investment portfolios.
Overall, portfolio’s with adequate diversification have performed well compared to peers and benchmarks (or broad share markets). This is owing to the broad diversification across different asset classes, strategies and funds. In the market environment of 2019, the exclusion of shares in portfolios was detrimental to performance as the share market hit an all time high. Fast forward a few months and the recent volatility is another strong reminder for investors on the importance of diversification. We have always cautioned clients on predicting portfolio outcomes on forecasts as no one can predict the future, irrespective of their talent or intellect. While returns can change dramatically in the short-term during a crisis, diversification remains the key defence against unpredictable outcomes.
Whilst it’s never easy seeing your portfolio balance reduce, history has shown us that those who ignore the noise of short-term falls, and remain invested generally have the better long-term portfolio outcomes. This can be illustrated via the recent drops where the Australian All Ordinaries at one stage was down 37%. Anyone who sold out on or around that time has missed out on a subsequent rebound of 20% from the low point.
Take a long-term view
We are well aware that many businesses are suffering in the short-term, however, where possible it is worth taking a long-term view of things when making investment decisions. We really liked this example from MLC Portfolio Manager, Myooran Mahalingam that outlines how taking a long-term view could be beneficial for your investment decisions.
While reviewing the performance of your investments is an important exercise, we would caution investors reading too much into the short-term trends as markets can be irrational in the short-term. Overall, it hasn’t been an easy period for investors, nonetheless, the experience has highlighted the important role diversification plays within a portfolio. As such, in a very uncertain economic and investment environment going forward, we continue to ensure the portfolios are highly diversified and not overly reliant on any one asset class, sector or thematic for returns while providing strong downside protection.