If the events of 2020 have taught people anything, it’s that you cannot predict the future. Uncertainty in the economy has an impact on investment markets, so it’s important to ensure you build an investment portfolio robust enough to weather the storms. To help you on this quest, we’ll be looking back at the events of 2020 (and beyond) to identify the lessons that will help you protect your investments in the long-term.
GDP fell by a staggering 19.1% in the three months to May 2020, with the economy only growing by 1.8% in May. However, since lockdown has been eased significantly in June/July, and as the new government measures come into fruition, there are hopes that we will see a stronger bounce back in the coming months. Even the optimism surrounding a COVID vaccination yesterday resulted in FTSE 100 and US stocks soaring.
It’s important that when you invest, you see it as a long-term choice, and understand that during that period, you will experience drops in value, as well as rises. When markets waiver, it’s not the appropriate time to make impulsive investment decisions. But it could be the prompt you need to revisit your investment plan and assess whether you are balancing the right amount of risk, in the right places.
But, before you do that, let’s look back at what 2020 (and beyond) has taught us about investing during market volatility.
Bear and Bull Markets
- Bear market = a decline of 20% or more in prices
- Bull market = an increase of 20% or more in prices
Since it’s launch in 1969 to 9th March 2020, the FTSE All-Share experienced eleven bear markets, in contrast to nine bull markets during that same time. However, the bear markets on average tend to be shorter, lasting just over a year and experienced an average drop of 36%, compared to the average bull market which offered an average gain of 142% over an average of nearly 1,500 days.
There will always be market swings that are painful at the time, but what these stats show is that over the long-term investors that held tight during bear markets, have often been rewarded with higher and longer sustained bull market returns.
So, what should we take away from the events of 2020:
1. Don’t fixate on losses
There will always be periods of winning and losing.
But, unless you decide to sell, your number of shares won’t fall during a downturn, only the price of them will. And, a market recovery should see a revival of your portfolio over time.
If you’re stressed or worried about your investments, then perhaps you will need to re-evaluate the amount of risk in your portfolio, ensuring that your portfolio is balanced across different asset classes, and diversified within them.
2. Avoid making rash decisions
During a market downturn, it is often the case that inexperienced investors will overreact and sell riskier assets, moving to fixed-interest securities or cash equivalents.
However, while it sometimes takes a market shock for investors to recognise the risk in their portfolio, there is no benefit in selling riskier assets during market volatility to move your money back when the ‘time is right’.
“In the midst of every crisis, lies great opportunity” – Albert Einstein
If you make rash investment decisions during market losses, then you’ll likely be missing out on great opportunities in the future. Research by Vanguard shows that nine of the twenty worst trading days occurred in years with positive annual returns, while thirteen of the twenty best trading days happened in years with negative annual returns. And they all happened very close together, although it is worth noting that past performance does not guarantee future performance.
3. Diversify your portfolio
A great way to cushion and protect your portfolio is to spread your investments across all sectors. That way, by holding assets that are not correlated to each other, when some see negative returns, you are likely to have others that will neutralise this.
You’ve heard it time and time again; don’t put all of your eggs in one basket!
4. Have a plan
It’s important to understand your end goal and why you are investing and for how long it’s likely to be for before you make any investment decisions. If you jump in blind, you’ll be prone to making errors such as market-timing, reacting to market ‘noise’ and chasing performance.
You can make an investment plan yourself, but there is a lot to think about and consider. You’ll need to start by taking stock of what you’ve currently got; to do this, you’ll have to complete a money fact find. Once that’s done, you should set out an investment plan that addresses your goals, risk appetite, the returns you need and expect, how often you want to check how your investments are doing, under what circumstances you’ll make changes and what product charges you’ll have to pay.
We would always recommend that you seek the advice of a qualified financial adviser. They can work with you to create a personalised plan that’ll help you reach your goals. As well as putting the foundations in place, your adviser will be on hand to answer any questions you have along the way, helping you feel confident in your financial future. It’s also in uncertain times like we’ve seen recently, that the support a financial adviser provides you is priceless.