Published on December 27, 2020
As we move towards the end of 2020, we look back with bittersweet feelings. The year has been one of the most challenging ones in the history of mankind. The health crisis at global scale, upheavals in the political landscape, widespread unemployment, heavy disruption in daily lives and the nerve-racking stock market gyrations, 2020 has seen it all. Investors have witnessed heavy volatility, grappled with extreme emotions, and learnt some lessons the hard-way.
The COVID-19 pandemic had an adverse impact on the economy and investors have started valuing financial security like never before. This year has taught us the criticality of long-term planning and reinforced some of the old school investment lessons that many of us had ignored.
Say no to panic selling
As the year begun, many investors were overjoyed as the markets skyrocketed and touched new highs. However, after the COVID-19 pandemic struck and the market dived deep down in March, investors hit the panic button and started selling off their positions. They wanted to exit equities altogether and shift their allocations to cash or bond. However, there were some who held tight and did not take any drastic step.
As markets stabilized and recovered from the losses within few weeks. Those who sold off regretted the move, and those who stayed on rejoiced. The markets reached an all-time high and the long-term investors were eventually rewarded. Moral of the story: It’s easy to be swayed by fear and greed. However, emotions have no place in investing. It is patience that pays off. If you are patient in the face of turbulence, you will sail through smoothly.
Diversify. It’s important
Discourses about portfolio diversification have become cliché. However, 2020 proved that no matter how old school this concept is, it is still the best risk mitigation strategy available. After the coronavirus halted the market rally by mid-February, the S&P 500 plunged 20%, indicating the most rapid crash in the US in the century. While equities were in free fall, the investment grade bond slipped just 0.6% during the period. Investors who had been underestimating cash all this while realized its importance too. With unemployment levels at record levels, and markets in a tizzy, cash is your best ally in times of emergency. It is the most liquid asset that one can have and surely deserves an allocation in your portfolio. Hence, an ideal portfolio is the one with a prudent blend of stocks, bonds, cash, and other asset classes.
Diversification is all about distributing your risks across various asset classes. But it certainly doesn’t end there. The allocations also need to be revisited and optimized according the market situation and changes in investors risk preferences.
S&P Historical Annual returns
Timing the market is a big no-no!
If you are only sitting on the fence thinking about the right time to enter the markets, you will be disappointed to know that there is none. It is hard to time the market. It is a tough decision to sell the market at its peak or take a position when it hits rock bottom. This is because markets are volatile and no one can predict it accurately irrespective of the amount of experience or knowledge one has. The quantum of market volatility in 2020 proved this. Instead of trying hard to time the markets, it is better to build a long-term investment strategy. A better option for gains in the prolonged period is “Buy and Hold” and not “Time the market”.
Planning is important
The level of uncertainty that 2020 brought in led us to realize that having a long-term financial plan is a must. Designing a long-term financial plan and inculcating a disciplined approach is the key to creating wealth. It can be something as simple as starting a Systematic Investment Plan (SIP) and putting in a fixed amount every month. It doesn’t matter if the amount is small. It is the consistency that matters. You must have a very clear idea of each investment avenue and where it will eventually lead you.
Also, building an emergency fund must also be a part of your financial plan. The pandemic brought the economic activities to a screeching halt, and people were rendered jobless overnight. Hence, setting aside a certain amount every month, and building an emergency fund covering necessary expenses of upto six to eight months goes a long way in easing financial distress.
Opportunities exists even in times of stress
Even though many industries suffered badly during the crisis, there were some that have prospered during this phase. The coronavirus crisis changed the way we lead our lives and made it heavily reliant on technology. Consequently, sectors like cloud computing, e-commerce, edtech, and virtual meeting providers have brought about a new way of life. They seized emerging trends and came out as winners even in times of uncertainty. The bottom line is never give up on equities altogether even in the worse times. There are always some trendsetters who see the bigger picture and prove to be long-time bulls.
It is difficult to predict whether we will ever see a year like 2020. However, the investing lessons it has taught us are extremely valuable and practical. If followed, it can be extremely helpful in kind of recessionary atmosphere. The art of investing is a constant learning process, and it is never too late to start learning. In adverse market situations, making the right investing choices can get a little challenging. However, with discipline, right knowledge and a long-term approach, you can sail through the choppy water and ensure your financial stability.