Bringing risk and return into focus – A roller coaster or Sunday drive

27 July 2020

Shaun Haden, Wealth Adviser |

Just over two months ago, the market was in fear of the reaper - COVID-19. Infections were spreading globally, people and businesses were locking down, and global share markets fell quickly. The media had a field day, providing 24/7 updates on the state of the crisis and we were barraged by news articles with ‘what if’ situations.

In this article, we look at the impact of COVID-19 on the Australian share market (ASX 200) to 31 March 2020 and compare this to the performance of a diversified investment portfolio, which was invested as 60% in shares and 40% in bonds. While March is long behind us now, this period was chosen to highlight the difference in strategies in times of market stress.

Short-term impact

During the three-month period in question, the Australian share market was down a whopping 23%, while the diversified investment portfolio was only down 10%.

Prior to the downturn in February and March, the share market had been strong for the past 12 months. This stripped out some of the downside for those who invested over the whole period. 

Over a 12-month period, the Australian share market was down 14% while the diversified investment portfolio was down only 2%.

Long-term impact

We always say investment returns should not be measured for short periods. The chart below shows the journey of the diversified portfolio in dark green, compared to the Australian share market in light green, and cash in orange during the last 10 years.

With a lower risk approach than the Australian share market, the diversified portfolio accomplished a better result.

Investors who are fearful of negative returns in any given year and prefer to stay in cash were rewarded in some periods, but not over the long-term. This will continue to be the case with interest rates sitting at historic lows and not looking likely to return to significantly higher levels any time soon.

While share markets have recovered some of their February and March losses, as many countries have controlled the spread of infections and delivered large government stimulus packages, the range of outcomes relating to COVID-19 is still wide, which means share market volatility might not be over just yet.

To learn more about diversifying your portfolio to protect against market downturns and enhance returns, get in touch with a BDO Private Wealth Adviser today.

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