2020 has been an eventful year for investment markets. Impacted by the Covid-19 pandemic and government responses to this, there have been many valuable investment lessons that will apply in 2021 and beyond says Adrian Moy, Independent Financial Adviser at Pembroke Financial Services.
As the extent of the pandemic became known in March, stock markets around the world suffered sharp falls. In fact, fears of a recession meant the FTSE suffered its biggest fall since the 2008 financial crisis and trading was temporarily suspended on Wall Street as circuit breakers were triggered, according to the Guardian.
Since then, markets have bounced back but continued to experience volatility. The uncertainty of the situation, with governments changing restrictions and support as they try to control the virus, affected markets throughout the summer and autumn.
So, 2020 has been useful in highlighting the investment lessons we should keep in mind.
1. The unexpected does happen
Adrian said: “A year ago, who would have predicted that a global pandemic would have occurred? It’s probably not something you’ve ever considered when weighing up investment risks. Yet, it’s had a huge impact on investment volatility and opportunity in 2020.
“This year has taught us that the unexpected does happen. We can’t consider every eventuality but preparing for the unexpected can improve your financial resilience. In terms of investing, this may mean having liquid assets or a rainy-day fund you can use if investment values fall. This is particularly important if you’re drawing an income from investments. Having options for when the unexpected does occur should be part of your financial plan.”
2. Volatility is part of investing
No one wants to see the value of their investments fall. But volatility is part of investing. When you invest, you need to be aware of the risk that values can fall.
“This is why a long-term time frame and goal is so important when investing. Short-term volatility is often smoothed out once you look at investment performance over a longer time frame. It can be frustrating to see that investment values fell in 2020, but when you look at performance over the last five years, for example, you’ll probably still see an upward trend,” Adrian explained.
3. Diversifying is important
We all know we should diversify our portfolio. Investing in a range of assets, industries and geographical locations can help spread the risk. When one investment falls, another may perform better helping to create balance.
Adrian continued: “Covid-19 has had a far-reaching impact, with countries around the world affected by the virus. However, some industries have been affected far more than others. Travel and hospitality businesses, for instance, have been forced to close for weeks at a time in many places. In contrast, the pandemic has created opportunities for some firms too. While a balanced portfolio will still have suffered volatility, it can lessen the impact.”
4. Financial bias can affect us all
Investment markets have featured in the news more heavily than usual this year, thanks to the volatility experienced. If headlines or talk about the markets meant you considered changing your strategy, financial bias is likely to have played a role.
Financial bias simply means other factors besides facts have influenced your investment decisions. When markets fell sharply at the beginning of the pandemic, an emotional reaction that means you considered taking money out of the markets is normal. However, recognising where bias occurs and limiting the impact is important. Working with a financial adviser can help you with this as you have a professional you trust and one that understands your situation to talk to.
5. You can’t time the market
Adrian concluded: “Finally, the events of 2020 have supported the saying: It’s time in the market, not timing the market.
“If you’d tried to guess when to put your money into the stock market and exit this year, you’d probably have ended up making mistakes. Trying to time the market to maximise returns is incredibly difficult, as so many factors play a role. Even investment professionals with a huge number of resources make mistakes.”
Rather than trying to time the market, creating a long-term plan and sticking to it is usually the most appropriate strategy for investors.
What to expect in 2021
So, what lies ahead for the next 12 months? With lockdowns and restrictions continuing around the world, we expect further investment volatility as we head into 2021. But if 2020 has taught us anything, it’s that we can’t predict what’s around the corner. Think about your aspirations and build a long-term financial plan around these, including investing where appropriate.
Please get in touch if you’d like to review your investment portfolio for the year ahead.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.