This article has been written by expert contributor, Tony Kaye, Senior Personal Finance Writer, Vanguard Australia.
Sometimes it can be hard to see the wood from the trees. Investing is a good example of that. When markets become more volatile than usual, it’s easy to get distracted by the short-term events causing that instability.
And sometimes that can lead people to make rash investment decisions because of their immediate fear of financial loss. Yet, doing so is a fundamental investment mistake.
Why? Because history shows us time and time again that reactive investors will invariably miss out on the long-term growth that investment markets deliver.
A timeless lesson
Broadly speaking, the most successful investors don’t think in terms of days or weeks. Their strategies are usually built around much longer investment time blocks – often years or even decades.
The 2022 Vanguard Index Chart clearly demonstrates why having a longer-term approach to investing is essential.
Spanning back to 1992, it shows how a starting balance of $10,000 would have grown in value over three decades had that money been invested into different types of investment assets.
The Vanguard Index Chart follows the performance of six different asset types – Australian shares, United States shares, international shares, listed property securities, Australian bonds and cash – over the 30 financial years since 1 July 1992.
There’s an obvious takeaway from the chart for investors. That is, if you look at the volatility experienced over shorter periods, it’s clear that trying to time when to buy into assets, and when to sell out, is always fraught with danger.
It makes better sense to just invest and stay invested
Rather than trying to guess the best time to invest, it makes much better sense to just invest and stay invested.
The closing numbers in the chart, as at 30 June 2022, represent total investment returns. That is, they assume all the investment income that was earned along the way was reinvested back into the same assets and exclude any buying costs or taxes.
With an average annual return of 10.2 per cent, a $10,000 investment into the broad U.S. share market using either a managed fund or exchange traded fund would have grown to $182,376.
That’s a total compound return of more than 1,720 per cent.
Although not quite as strong as the growth from the U.S share market, a $10,000 investment into a fund tracking the Australian share market would have increased very healthily to $131,413.
That’s a 9 per cent per annum return over the last 30 years, and a total compound return of more than 1,210 per cent.
Invested into international shares (offshore markets excluding Australia), $10,000 would have risen to $94,184. In listed property securities, your money would have grown to $90,243.
Australian bonds would have delivered a 5.9 per annum return, increasing your money more than fivefold to $55,588.
The lowest long-term return over three decades has been from cash.
If you’d left your money in cash investments it would have earned 4.3 per cent per annum and grown to $35,758.
While that’s a much lower return than from other asset types, it’s still almost four times the original $10,000 invested.
Investing secrets revealed
Stay the course
First and foremost, investing into a range of key asset classes over longer periods of time is a proven way to build your wealth over time. While markets can fall sharply at times – think of the 2020 Covid-19 crash or the 2009 Global Financial Crash – having the resolve to stay the course and stick to your investing goals is one of the keys to long-term investment success.
Spread your money
The varied returns from the different assets shown in the Vanguard Index Chart also highlights the importance of diversification. The best-performing assets in some years can be the worst-performing in others. Spreading your money over a range of assets will help to smooth out intermittent volatility and achieve more consistent returns over the longer term.
Keep investing
Even a low initial balance will grow substantially over time when combined with compounding investment returns. By following a strategy of reinvesting distributions over a long period of time, the combination of market growth and compounding returns will likely deliver strong returns.
Tony Kaye is Senior Personal Finance Writer at Vanguard Australia. In his role, Tony regularly produces topical investment-related articles and educational content designed to help investors make well-informed decisions. Tony is a former managing editor and financial journalist, and his articles are published in Vanguard’s weekly Smart Investing newsletter and elsewhere. The above material has been republished with the permission of Vanguard Investments Australia Ltd.
Learn more about Vanguard here.
Prior to making an investment decision, retail investors should seek advice from their financial adviser. This document is intended as general information only.