Good things came to fund investors waiting in 2020. But what a terrifying wait it was.
Mutual and exchange traded funds of all levels delivered strong annual returns, even better than normal. Consider the largest fund by assets, a core holding of many 401 (k) accounts. Vanguard’s Total Stock Market Index fund returned 19.5 percent on December 22, more than double its average annual performance since 2000.
But first, investors had to withstand a plunge of 34 percent from February to March. Only by resisting the urge to sell and bypassing the pandemic-induced panic would they have gotten that full return.
Unfortunately, many investors did not have the decision or the ability to hold onto that. Job losses, money crunch and obvious fear caused many investors to withdraw their shares.
For most of this year, investors got more money out of US mutual funds and ETFs than they put in. It is a continuation of a long-standing trend as investors have been steadily moving money from stock funds to bond funds.
Bond funds, in turn, largely fulfilled their traditional role as stable forces for portfolios during stressful markets. They held up much better than equity funds in early 2020, and they also typically delivered solid returns for the year. This is despite warnings in early 2020 that bond investors should probably accept weaker returns, given the low returns.
According to Morningstar, the average medium-term core bond fund returned 7.3 percent in 2020 through December 22. That’s almost double the average annual return for the past ten years.
But even within these stereotypical stable funds, investors had to endure several days of rampant panic. The largest asset-based bond fund had a two-day period where it fell 1.7 percent and then another 1.6 percent. It has never fallen so sharply during the 2008-2009 financial crisis or periodic interest rate spikes in the 1990s.
As with stocks, those big moves were also a product of fear. During the lows of the market sell-off, investors were busy raising as much money as possible. In many cases, that meant selling high quality bonds because they were the easiest to sell, causing their prices to plummet.
When fears peaked in March, investors pulled 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 protecting against inflation, and the Federal Reserve said it will eventually push inflation above the 2 percent target as it tries to beat the economy. But investors still had to face a hefty sell-off in March to reap the rewards. The largest gold ETF had a week in March in which it lost 9.1 percent.
Nothing in 2020 was easy, even if it turned out to be lucrative. The best part is it’s finally over.