While investors might be tempted to switch around their portfolios in response to the latest developments of the coronavirus crisis, successful long-term investing requires the patience to ride out market volatility, according to Vanguard. 
Over 2020 so far, global equities have posted a total return of 3.87 per cent (in sterling terms) although as the table below marks clear, the path to getting there has hardly been smooth.
Georgina Yarwood, an investment analyst in Vanguard’s Investment Strategy Group, said: “The unfolding global Covid-19 pandemic precipitated elevated levels of market volatility during the first half of 2020.”
The onset of the coronavirus crisis halfway through February prompted a sharp plunge in stock markets as investors were panicked by the economic impact of lockdowns across the globe.
And while the coronavirus pandemic is far from over, markets have rallied from their lows on the back of massive amounts of fiscal and monetary stimulus launched across the globe.
Performance of index over 2020
Source: FinXL
This means the MSCI AC World index reached a peak on 19 February, then fell more than 25 per cent during the initial coronavirus sell-off. The market rout ended on 23 March, however, and since then global equities have climbed over 30 per cent.
But against this backdrop, how can investors approach their long-term investment planning? Yarwood recommended two main strategies.
Focus on the things that can be controlled
“Vanguard’s overarching investment guidance has always been – focus on those things that can be controlled,” the investment analyst started.
“It’s easy to get caught up in what is happening in the markets, the economy, manager ratings or the performance of an individual security or strategy. This can lead investors to overlook enduring fundamental principles of investing such as setting clear, appropriate investment goals; having a suitable asset allocation using broadly diversified funds; minimising cost; and maintaining perspective and long-term discipline.”
Yarwood conceded that it can be difficult for investors to resist the temptation to adjust their portfolios – especially when the markets are going through events as unusual as a pandemic.
But many appear to have realised the importance of avoiding short-term moves in their allocations: Vanguard found that less than 0.5 per cent of its US-based clients traded to hold an all-cash portfolio between 19 February and 31 May.
And most of those investors who panicked ended up with worse returns than if they stuck with their pre-Covid portfolios.
Source: Vanguard
Research by Vanguard compared the returns these investors achieved when they moved into cash with the returns they would have achieved if they had left their portfolios in their pre-panic composition.
It found that more than 80 per cent of those who d sold out of equities to hold cash would have been better off had they simply retained the portfolios they held on 18 February 2020
“Trading in response to market volatility requires getting two timing decisions correct: when to exit markets and when to re-enter them,” Yarwood said.
“A number of studies have addressed the difficulties of getting the timing right. The results are discouraging for proponents of market-timing. Investors should take heed of these lessons as the second half of this year will unlikely be without volatility.”
Take a long-term view
Another piece of research carried out by Vanguard this year looked at the changes in Vanguard’s US investors’ household wealth during the first quarter of 2020.
Unsurprisingly, it showed that household wealth changes depended on their underlying equity allocations: those with no equity allocation had essentially no change in wealth while investors with all-equity allocations had wealth declines of 20 per cent, almost identical to the S&P 500’s drawdown.
But when the time frame was extended to cover the 12-month period ending 31 March 2020, equity investors’ declines were more muted. Over a three-year period, almost all investors saw increases in wealth, with a hypothetical balanced portfolio containing 70 per cent equity and 30 per cent bonds growing by 12.4 per cent.
“The research suggests that investors should take a long-term view in thinking about market shocks and portfolio wealth,” Yarwood finished.
“Widening the time frame can provide the psychological peace of mind necessary to avoid overreacting to short-term events, including those associated with the current pandemic.”