How pausing contributions can add up...

The Australian share market rose just under 1.9 per cent in the March quarter – hardly an earth-shattering return, but a positive one nevertheless.

Over the 63 trading sessions to 31 March the S&P/ASX 300 Index, which tracks the top 300 companies on the Australian Securities Exchange, closed higher 37 times and lower 26 times.

There were seven occasions when the index rose on two or more successive trading days, and six when it fell two days or more in a row.

It’s very easy to become fixated on daily market volatility, and the commentary that analyses the factors driving it, and then respond by making knee-jerk investment decisions based on current market or economic events.

Which is why the end of March this year was an opportune time to take a longer-term high-level snapshot of what the Australian share market has done over the last few years.

Three years ago, back in March 2020, the S&P/ASX 300 Index dropped more than 35 per cent over about 20 trading sessions as a result of COVID-induced investor panic.

It was an unsettling period for many. Some investors cashed out of the market completely while others persevered, choosing to maintain their investment strategy.

Now, despite strong bouts of market volatility over the last 18 months due to economic, commercial, and geopolitical factors, the Australian share market is trading around 60 per cent higher than its low point in March 2020.

Reactive investors who totally cashed out at that time will have missed out on massive portfolio gains. On the other hand, investors who held on, and who even continued to invest as the share market fell, are well ahead.

At the moment it’s not necessarily market volatility that’s driving some investor behaviours, but rather the rising cost of living impacting many household budgets. And, in cutting back on discretionary spending, there may be a temptation by some investors to pause their regular investment contributions.

So, what are the potential consequences of doing that? While the past performance of the share market is not an indicator of future performance, it can be used to show what would have happened to investors who decided to pause their investments at different points in time.

To illustrate this, let’s use an example of someone who invested $10,000 into an S&P/ASX 300 Index fund in January 2000 and made monthly contributions of $1,000 into the same fund.

Based on the performance of the Australian share market since then up until the end of March this year, their total investment balance would have grown to around $811,500.

That includes their $278,000 in contributions, meaning their gross market return would have been around $533,500.

But let’s say the same investor is someone who gets easily spooked by market volatility. During the Global Financial Crisis, when markets fell more than 50 per cent over 2008 and the early part of 2009, they paused their contributions for more than 12 months.

They paused them again after the 2020 COVID market crash, this time for six months, and resumed making them as the market rebounded later that year.

Then, due to the recent impact of inflation and rising interest rates, they paused their contributions indefinitely once again in May last year.

As a result of these three pauses over time, their investment balance would have totalled around $750,000 by March this year.

That’s a gap of more than $61,000 on what it could have been. Even adding back all the contributions they didn’t make over time, their balance would still have been around $30,000 lower than if they had just kept to their original plan.

The main point here is that pauses in investment contributions can really add up and have a substantial impact over the long term.

Rather than stopping completely, if the same investor had just temporarily reduced their monthly contributions to $500 instead, their investment balance would have still grown to around $780,600 by March this year.

Markets will always rise and fall. Trying to time when to stop investing and then restart investing is difficult and generally a losing strategy for most investors.

It’s smarter to stay invested and to keep investing, leveraging the combination of compounding returns and low investment costs, which together really add up over the long term.

An iteration of this article appeared in The Australian Financial Review.

Vanguard Australia

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