Happy New Year! 2020 is no more, and 2021 just started! This post analyzes how the markets performed last year and what you can learn from it. It focuses on aspects that are relevant to long-term index investors based in Europe.
As I explained in my book, I don’t think it is healthy to frequently check the market. However, I like to review my portfolio yearly because:
- I learn about the market and how it behaves;
- I can evaluate my portfolio’s investment performance and how much I’m saving;
- It inspires me to keep investing;
The portfolio review has two parts:
- Market overview – where I analyze the market and gather learnings;
- Personal overview – where I evaluate multiple numbers of my actual portfolio;
This post focuses on the market overview. You can learn more about the portfolio review in my book. The book has a sub-chapter dedicated to this topic.
You can’t talk about 2020 without mentioning COVID-19. At the time of writing, there are 82+ million COVID-19 cases and 1.7+ million COVID-19 deaths worldwide. We had to resort to multiple lockdowns to contain the spread of the virus. Countless businesses had to close doors, and millions of people are unemployed. Saying that 2020 was a challenging year feels like an understatement. Vaccination is slowly rolling out, and that brings me optimism. I hope you and your family are safe.
World Equities in 2020
I use the Vanguard FTSE All-World UCITS ETF (IE00BK5BQT80) to analyze performance for the year 2020. Note that there are other good ETFs that replicate world equities’ performance and have a similar performance – I just needed to pick one.
If you were to invest €10,000 at the start of the year in the Vanguard FTSE All-World ETF, it would be worth €10,539.67 by the end of the year. This represents a total return of 5.40%.
Just by looking at the final balance, you wouldn’t know how much of a roller coaster this year was:
- This investment peaked on February 19th at €10,587.55;
- Amid the COVID-19 crisis, prices fell until they hit bottom on March 23rd when this investment was worth €7,042.84 – a 33.4% reduction from the peak;
- Policies enacted by central banks worldwide propelled asset prices to recover in late March. These policies included quantitative easing, cash injections into the banking system, lowering interest rates, and fiscal stimulus.
- Prices have been on an upward trajectory since late March with occasional significant drops in early June, late July, early September, and mid-October.
- After the investment dropped below €10,000 on February 25th, it only recovered past €10,000 on October 11th.
- The maximum drawdown – the difference between peak and bottom – was -33.4%. The market never really recovered to its February 19th peak of €10,587.55, so the drawdown never really ended within this year
World Government Bonds in 2020
I am using the Xtrackers Global Sovereign UCITS ETF EUR Hedged (LU0378818131) to analyze the performance for the year 2020. Note that there are other suitable ETFs that replicate world government bonds’ performance, and they will have similar performance – I just needed to pick one.
If you were to invest €10,000 at the start of the year in the Xtrackers Global Sovereign ETF, it would be worth €10,421.86 by the end of the year. This represents a total return of 4.22%.
These returns and volatility are unusually high for bonds. The same macroeconomic events caused by COVID-19 that affected equities also affected bonds:
- The investment peaked on March 9th at €10,563.19. This peak happened due to investors fleeing equities for the safety of bonds and central banks’ response to the pandemic.
- Between March 9th and March 18th, bond prices fell abruptly, and the investment was worth €10,025.54. Equity prices also fell around the same period. This period was unusual because bond prices usually go up when equities go down. Bond prices go up because the demand for bonds increases and demand for equities decreases during uncertainty periods. However, during this period, demand for both bonds and equities decreased because many investors attempted to sell their investments for cash. Central banks stepped in to mitigate these issues by creating bond purchase programs to increase demand.
- The investment barely dropped below €10,000 during the year.
- The maximum drawdown was -5.1%. The market never really recovered to its March 9th peak of €10,563.19, so the drawdown never really ended within this year.
Reflections on 2020
- It is hard to predict the (short-term) future. Many predicted a steep decline caused by the pandemic, but few predicted such a quick recovery. The outlook on the stock market went from ultra-pessimism to ultra-optimism in just a couple of months. Things are never as bad as they seem or as good as they seem. The beauty of index investing is being able to enjoy the gains of the market while avoiding predictions.
- It is easy to be optimistic during a market decline when you have job stability. I consider myself fairly risk-averse. At this stage in my journey, the thought of a sharp market decline does not scare me. However, witnessing my employer’s business be significantly affected by COVID-19 was scary. Some people increased their investments during March/April because shares were very cheap. I didn’t invest beyond my regular monthly contributions because having extra cash would be useful if I got unemployed.
- Bonds are doing their job. Bonds carry a bad reputation nowadays because of their low/negative yields. However, bonds provided safety amid the market decline, as shown by their smaller drawdown (-5.09% vs. -33.40%) and bottom (€10,025.54 vs. €7,042.84). Bonds worked as a great diversifier to equities. Bonds had an unusually high return (+4.22%) because of falling yields. We shouldn’t expect such high returns for bonds going forward.
- Central banks managed this crisis well. The market had a swift recovery because central banks reacted quickly. Policymakers used tools that proved effective during the Great Recession (2007-2009) and the European sovereign debt crisis.
- The stock market is not the economy. The stock market has recovered from the effects of the pandemic, but our economy hasn’t. Lockdowns have restricted economic activity, and millions are unemployed. Different sectors are recovering at different rates. As represented by the NASDAQ 100, the technology sector had a total return of 34.54% (!) in 2020. However, sectors like travel, hospitality, and food services are still struggling.
- You can always come up with a reason not to start investing. I saw people asking themselves whether they should invest at all price points during this year: in February when prices peaked, in March when prices fell drastically, in June after prices increased for months, and in December when the market recovered. You are never going to find the perfect time to invest. The best time to invest was yesterday. The second best time to invest in today and to do it again tomorrow.
If you plan to start investing in 2021 and wonder where to start, take a look at my book – Introduction to Investing In Index Funds and ETFs. The book covers what you need to know and do so you can start investing. It covers both the theory and practice of investing in index funds for residents in Europe.
“Clear, concise language, concrete arguments and recommendations is what makes this the best on-boarding handbook I have ever read. It takes literally a week to get up to speed with the world of ETFs. Yet, combined with the blog content it is one of the most comprehensive sources on the topic on the Internet. I only wish I have read this sooner!” – Piotr S. (Poland)
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Disclaimer: This information is for educational and entertainment purposes only. This does not represent, in any case, specific investment, legal nor tax advice nor recommendations to purchase a particular financial product. Learn more at https://indexfundinvestor.eu/disclaimers/