Why history is your clients’ best investing teacher

Past performance is not an indication of future performance. But that doesn’t mean your clients should ignore market history.

When we’re investing for the long term, we need to think in terms of decades, not years. This means maintaining a sense of historical perspective when markets head south.

Being able to place market downturns, recessions, or periods of volatility in context makes us better investors. It’s the key to controlling our emotions and cultivating the discipline needed to stay the course with our investments.

Activate your clients’ rational brain

Experienced investors know first-hand how human emotions can drive market movements and our own investment decisions. But having seen the worst of what markets can offer, they’ve also seen the best. And the best usually far outweighs the worst. Knowing this allows them to be less reactive during periods of market stress or uncertainty.

For the less experienced, resisting the urge to sell in response to a market fall or buy in response to a market jump can require extraordinary willpower. Even if we’ve committed to an investment plan, we can still fall prey to fear, greed or inertia.

As the role of advice evolves, advisers are no longer just practitioners but also behavioural coaches to their clients. Their task is to guide clients through the cycle of market emotions by helping them stay focused on what really matters: long-term investment outcomes.

Mastering our emotions requires us to engage the rational part of our brain—known in behavioural science as system 2 thinking. To do this, we need the right data presented in the right way.

Simple yet powerful tools like the Vanguard Index Chart offer a striking demonstration of the importance of sticking to a long-term investment plan. It tracks the returns of major asset classes through different market conditions over the last thirty years, and it shows that, while markets do fluctuate, asset values have steadily risen over time.

Click here to view the Index Chart

For example, $10,000 invested in Australian shares in 1993 would have grown to $138,778 in 2023 (assuming no acquisition costs and taxes and all income reinvested), representing an annual return of 9.2%. As the chart shows, this long-term growth has endured multiple bear markets, recessions and geopolitical events along the way. In contrast, if an investor had invested the same amount in cash, their investment would have grown to only $34,737.

Having the Vanguard Index Chart prominently displayed or sharing it with clients regularly will help reinforce the importance of focusing on the bigger, long-term picture. And it may give less experienced investors the confidence boost they need to stick with their investment plan.

A generation of market history in one chart

To put things in perspective, 30 years of market history covers nine Australian prime ministers, five U.S. presidents, and four periods of recession for the Australian economy.

It also covers:

• The launch of Netscape Navigator in 1994 and the bursting of the dotcom bubble in 2000.
• The Asian currency crisis of 1997, the GFC of 2007-09, and the COVID crash of 2020.
• The 9/11 terrorist attacks in the United States, the second Iraq war, and the Russian war in Ukraine.

And that’s just the past 30 years.

Governments come and go. Financial crises give way to periods of steady growth and stability. Conflicts and geopolitical tensions wax and wane. But the long-term wealth-generating power of the market remains a constant.

Your clients don’t need a history lesson to understand the power of staying the course. By showing them how markets have behaved over long periods of time, they can draw the lesson out themselves.

Access the Vanguard Index Chart and supporting material

The 2023 Vanguard Index Chart is now available in digital and printed formats, with a range of supporting material to help you communicate this important message.

To help your clients get the most out of the Index Chart, we’ve developed additional resources—including our customisable Digital Index Chart, an educational video, and a client communication template—to support your conversations and reinforce the need for a long-term approach.

So your clients can feel confident in meeting their investment goals, no matter how experienced or inexperienced they may be.