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Good things have come to fund investors who have waited into 2020. But what a terrifying wait has been.
Mutual funds and exchange traded funds from all walks of life have produced strong annual returns, even better than usual. Consider the largest fund in terms of assets, a core portfolio of many 401 (k) accounts. Vanguard’s Total Stock Market Index fund returned 19.5% as of December 22, more than double its average annual performance since 2000.
But early investors had to resist a 34% drop from February to March. It was only by resisting the urge to sell and avoiding the panic caused by the pandemic that they would have gotten this full return.
Unfortunately, many investors did not have the determination or the ability to hang in there. Job losses, cash crunch and sheer fear have caused many investors to pull out of stocks.
For most of this year, investors withdrew more money from U.S. mutual funds and ETFs than they invested. This is a continuation of a multi-year trend, with investors regularly moving money from equity funds to bond funds.
Bond funds, for their part, have largely fulfilled their traditional role of stabilizing portfolios during stressful markets. They held up much better than equity funds at the start of 2020 and generally produced hearty returns for the year. And this despite warnings in early 2020 that bond investors are likely to accept lower yields given the low yields.
The mid-to-mid-term core bond fund has generated a return of 7.3% in 2020 through December 22, according to Morningstar. That’s almost double its average annual return over the past decade.
But even within these stable, stereotypical funds, investors had to endure several days of frantic panic. The largest bond fund in terms of assets had a two-day run of plunging 1.7% and then 1.6%. It has never seen such a steep decline during the 2008-09 financial crisis or the intermittent interest rate spikes of the 1990s.
As with stocks, these big moves were also the product of fear. In the depths of the market liquidation, investors struggled to raise cash as best they could. In many cases, this meant selling high-quality bonds as they were the easiest things to sell, causing their prices to drop.
When fears peaked in March, investors withdrew nearly $ 230 billion from taxable bond funds and ETFs, according to the Investment Company Institute.
Gold funds shone in 2020 as investors sought a safe place to hide from the uproar.
Gold funds have a reputation for hedging against inflation, and the Federal Reserve has said it will let inflation eventually exceed its 2% target as it tries to sink the economy. But investors still had to face heavy liquidations in March to reap the benefits. The largest gold ETF had a week in March when it lost 9.1%.
Nothing in 2020 was easy, even if it turned out to be lucrative. The best thing is it’s finally over.
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