What 2020 Taught Me
Enough said about how crazy a year it was. This is what it taught me about money and investing…..that as crazy as it was, many of the same rules applied in 2020 as all the years before it!
Cash buffers and income protection insurance are important. It is wise to build a safety net in case your income unexpectedly falls like it did for many people during covid lockdowns. I typically advise my clients to hold between 6 and 12 months of living expenses in cash savings so they have sufficient time to make whatever adjustments that are prudent, including selling assets. This reduces unnecessary stress and anxiety and pressure to sell assets quickly.
Buy and hold is still pretty hard to beat. Timing market moves is nearly impossible – don’t try unless you are a seasoned professional…and even then... best not to try! Very few people managed to get out at the share market top in February and get back on board again for the rally from March. Buying and holding in the U.S. stock market would have meant sitting through an excruciating 30%+ peak-to-trough drawdown in a month. It also meant experiencing a 60%+ recovery ever since. The sum total of these two polar-opposite market moves is a year-to-date gain of more than 15%. Could things have gone much worse for those who held their stocks and didn’t panic? Most certainly. But the great thing about a buy and hold strategy is the fact that it is so simple and still very hard to beat.
Emotional decisions derail your finances. Try not listen to hype and hysteria. During 2020 investors were bombarded with information and opinions around what the coronavirus would mean but much of this was just noise. Financial coverage was often alarmist, unbalanced and created higher levels of uncertainty. Avoid making hasty decisions when investors are being driven to extremes. In the midst of a crisis, focus on a long term investment strategy that is designed to suit your degree of wealth, your age and your investment risk profile.
Risk management matters. Almost everyone misjudged the virus, including governments, health officials, economists, market strategists and portfolio managers. While no-one was prepared for the pandemic, those that were prepared for some type a risk event were certainly better off - which is why it is always a key part of our wealth planning for all clients. This was the moment when diversified portfolios with a quality focus and long term strategy came into their own.
Bad times present great opportunities. Always try to keep some cash at hand for when they arrive. And they always arrive at some point.
Markets can make you feel like a fool and a genius in the same year. Holding onto your stocks in mid-March when the entire world felt like it was in a free-fall felt like the height of insanity as an investor. Now everyone who held on feels like a genius. Neither of those extreme feelings is ever completely valid. You’re never as dumb as you feel during a bear market nor as smart as you feel during a bull market.
Outcomes will always seem obvious in hindsight. Governments threw trillions of dollars at this crisis. They literally gave people money. It seems obvious now that those trillions and an implicit backing from the Fed, the RBA, ECB would provide a floor under the markets, but few people at the time were predicting a rush back to all-time highs while these programs were being rolled out. A depression can be stopped in its tracks.
Markets are moving faster. During the 4 weeks from late February through late March 2020 the stock market experienced the fastest bear market of 30% or worse from all-time highs. Those highs were back again just 5 short months later. Companies that are still losing money are seeing their market caps grow by billions of dollars a day as investors look to the future of what they might become. Everything, including market cycles, is in hyperdrive - which will no doubt continue in a world where technology is making everything faster.
Investment valuations should be assessed relative to interest rates. While price to earning ratios may be high, low interest rates make the yield on shares relatively attractive.
There is political risk in developed markets too. There is a long held view that political risk is an emerging market phenomenon. During 2020 Brexit showed that wasn’t necessarily the case, as did the recent upheavals in the US political system. Financial markets started to get jittery as it looked like President Trump may not go quietly even if he lost the election and rallied significantly when it became clear that his legal challenges were going nowhere. Because it was the US the effects were felt across markets worldwide.
Have faith in humans. When push comes to shove as it did in 2020, humans find remarkable solutions to difficult problems. Being too gloomy by buying into doomsday scenarios and avoiding investing altogether will most likely damage your prospects for long term wealth.
Defensive isn’t what it used to be. For many years, it has been received wisdom that technology stocks are for the good times, those years of sustained expansion when economies are ticking along nicely. It turns out that they are also pretty defensive in a crisis. COVID-19 has accelerated digital transformation, rapidly enabling the new ways we are now connecting, working, eating, learning and seeking medical assistance. In contrast, many of the stocks that have traditionally been labelled defensive – energy, utilities, consumer – were uncomfortably volatile during 2020.
Keep your chin up - there’s light at the end of the tunnel. The lesson from 2020 is that corporates, government, and investors alike will need to remain adaptable and innovative in the face of uncertainty but we enter 2021 with cautious optimism for a broad-based economic recovery. The expectation of a vaccine in 2021 is a hopeful sign that the worst is behind us. This, combined with growing consumer confidence, increasing sector resilience, a softening of geopolitical dialogue (post Trump’s presidency), low interest rates, significant competition for assets and strong valuations provides a positive way forward.
Clients can cope with casual clothing. And all of those beautiful RM Williams shoes I bought in 2019 may have been an over investment. 😬