Good things came to finance the investors who waited until 2020. But what a terrifying wait.
Mutual funds and exchange traded funds from all bands produced strong annual returns, even better than usual. Consider the larger fund for assets, a core stake in many 401 (k) accounts. Vanguard’s total stock index fund returned 19.5% on December 22, more than double its average annual return since 2000.
But early investors had to endure a 34% drop between February and March. Only by resisting the urge to sell and shun the panic caused by the pandemic would they have achieved this complete return.
Unfortunately, many investors did not have the resolution or the ability to hold on. The loss of jobs, cash contractions and fear, caused many investors to withdraw from the shares.
For most of this year, investors withdrew more money from U.S. equity investment funds and ETFs than they put up. It is a continuation of a trend of many years, as investors have been transferring money from equity funds and bond funds.
Bond funds, for their part, largely fulfilled their traditional role as stable portfolio forces in stressful markets. They held up much better than equity funds in early 2020 and also tended to produce strong returns for the year. Despite warnings in early 2020 that bond investors would likely have to accept weaker returns, given the low yield.
According to Morningstar, the medium-term core bond fund returned 7.3% in 2020 through December 22nd. It is almost double its average annual return over the last decade.
But even within these stereotypically stable funds, investors had to endure several days of rampant panic. The largest bond fund for assets had a two-day stretch, where it fell 1.7 percent and then another 1.6 percent. It never had such a big drop during the 2008-09 financial crisis or during the intermittent interest rate hikes of the 1990s.
As with actions, these great movements were also a product of fear. During the depths of market liquidation, investors struggled to raise as much cash as they could. In many cases, this meant selling high quality bonds, as they were the easiest things to sell, which drove their prices down.
When fears peaked in March, investors withdrew nearly $ 230 billion from taxable bond funds and ETFs, according to the Investment Institute.
Gold funds shone in 2020 when investors were looking for a safe place to hide from the tumult.
The gold funds have a reputation for protecting themselves against inflation and the Federal Reserve said it will allow inflation to end up exceeding its 2 percent target as it tries to start the economy. But investors still had to face strong sales in March to reap the full benefits. The largest gold ETF had a week in March where it lost 9.1 percent.
Nothing in 2020 was easy, even if it turned out to be lucrative. The best part is that it’s finally over.