The Impact of March 2020 on Your Portfolio

We have just gone through one of the most difficult months for investors. The worst part of it wasn’t the steep decline in our portfolio values, it’s been not knowing what’s coming up next. While it is surreal to see the world economy freeze up due to the global pandemic, it’s important to remember that equity bear markets, and the damage they inflict on portfolios, are part of an investor’s life.

We all must muddle our way through several market cycles in order to generate decent long-term returns. There is no gain without pain. But a little perspective will help.

What’s the Damage So Far?

Global equities have delivered positive returns in most years from 2009 to 2019, as illustrated below.

Source: Morningstar

But all global regions suffered substantial declines in the first quarter of 2020. As indicated in Table 1 below, the year-to-date returns have ranged from -12% (U.S. equity) to -21% (Canadian equity). These numbers are deeply negative, but they still fail to reflect how scary the plunge was, since a late rally managed to erase some of the losses.

On March 23, Canadian, U.S., international and emerging equities were down between -22% and -34%.

The last column of Table 1 shows how much of the past gains have been lost. For example, Canadian equities have given back all their price appreciation observed since March 2016, exactly four years ago!

Table 1: The Equity Market Decline in Numbers (all in Canadian dollars)

Source: Bloomberg

Did Diversification Protect Investors?

Yes.

First, although high-quality bond ETF prices plunged momentarily, due to illiquidity in the market, they have since mostly recovered their value. Having bonds in a portfolio—preferably in the form of bond ETFs and mutual funds—is expected to be the single most important factor in limiting portfolio losses during market crashes. And they have done a fine job so far.

Second, foreign markets mostly outperformed Canadian equity. As a result, international diversification is reducing risk as expected.

Third, international diversification has had a positive side effect: the U.S. dollar, the euro and other major currencies appreciated against the Canadian dollar, which further reduced the impact of the equity market’s overall depreciation.

Keep in mind that diversification is not meant to eliminate portfolio risk, but to help manage it. If I were to assign a grade to how effective diversification has been in the current crisis so far, I would give it an A+.

History as a Guide to What May Lie Ahead

The bear market of 2020 is only two months old. As you can see from Table 2 below, the shortest bear market of the last 50 years occurred in the fall of 1987: it ended after three months. But the current crash is deeply rooted in the real global economy. While I am not a prophet, I believe investors should expect it to last longer. Then why maintain your investment plan? Because global bear markets are normally followed by recoveries, leading to a general long-term trend towards positive returns.

Table 2: Global Stock Returnsⁱ During Bear Markets 1970–2020 (in Canadian dollars)

[1] MSCI World in CAD

Source: Morningstar

Chart 2: $100 invested in the Global Equity Index from 1970 to March 2020

Source: Morningstar