While 2021-2022 may not have been a stellar year for the majority of investors, it’s worth remembering that the worst performing asset class one year can be the best the next, and vice versa. That’s why successful investing benefits from having a good balance.
The last financial year, particularly the first half of 2022, saw a sharp rise in volatility on global investment markets.
It was hardly surprising. Stock markets, bond markets, commodities markets, and currency markets all found themselves caught up in a turbulence, shaped by a series of unsettling events.
They included the ongoing spread of COVID-19, with China forcing many of its major cities and manufacturing hubs back into lockdowns, and the start of the Russia-Ukraine war this year.
Inflation levels were already starting to rise in the second half of 2021, but the combination of these events has intensified the pressure on already strained global supply chains in 2022.
With the prices of goods and services rising at their fastest pace in decades, central banks have quickly begun raising their official interest rates in a bid to dampen demand.
Reflecting the stormy conditions – and the widespread sell-offs on financial markets over recent months – most investment asset classes recorded losses over the 12 months to 30 June.
A turbulent financial year
Australian share market
U.S. share market
Australian listed property
Note: Asset class percentage return calculations are based on market open levels on 1 July 2021 and closing levels on 30 June 2022 for the S&P/ASX All Ordinaries Accumulation Index. MSCI World ex-Australia Net Total Return Index. S&P 500 Total Return Index. Bloomberg AusBond Composite 0+ Yr Index. S&P/ASX 200 A-REIT Accumulation Index. Bloomberg AusBond Bank Bill Index.
Putting 2021-22 into perspective
2021-22 was anything but a stellar financial year for the majority of investors.
That’s especially the case when you compare it with 2020-21, when the Australian share market gained 30.2 per cent, the U.S. share market grew by 29.1 per cent, and international shares recorded a 27.5 per cent return.
But the last financial year wasn’t the first period where returns have been negative across most key asset classes.
Think back to the Global Financial Crisis in 2008 and 2009, when most investors recorded back-to-back negative returns.
The Australian share market fell 12.1 per cent in the 2007-08 financial year, and then by a further 22.1 per cent in 2008-09.
Over the same two-year period the U.S. share market fell 23.2 per cent and 12.4 per cent, while the returns from Australian listed property were negative 28.6 per cent and 31.2 per cent.
Then, as economies around the world emerged from the GFC, financial markets embarked on a growth spurt for the best part of the next decade.
Even in early 2020, when financial markets fell heavily as the spread of COVID sparked widespread investor panic, returns from most asset classes had started to recover by 30 June 2020.
Five years of returns
Another point to keep in mind that asset class returns vary from year to year. The best performing asset class one year can be the worst the next.
The above table has the best performing asset class for each year highlighted in green, and the worst performing in red.
In 2021-22, cash was the only asset class to deliver a positive return – albeit that after inflation, the purchasing value of cash savings declined.
In 2020-21 cash was once again the worst performing asset class.
The bottom line
Returns from asset classes are never consistent. Successful investing benefits from having a good balance.
Rather than trying to pick the winning investment each year, spreading your investments across a wide range of assets can help to reduce the risk of loss over longer periods that could occur if you had all your capital tied to just one asset class.
Investors who are well diversified tend to enjoy a smoother investment ride over the long term.
Long-term returns data also proves that time in the market will deliver consistent growth over longer periods despite periods of short-term volatility.
Making additional contributions and harnessing the power of compounding returns can make an enormous difference over time.
And it’s never too late to start doing this to give yourself the best chance of investment success.