Looking back over the year’s events is liable to make one’s head swim. The start to our “roaring twenties” has often been anguished with roars of a wholly negative kind.
Surveying the rubble does yield a few gems of knowledge that investors can profitably take forward, however. Vaccine development may be incredibly good news, but much of the economic pain has yet to be truly felt, so we need to pool all the wisdom we can. Here’s what has stood out to me over the crisis.
1. Significant cash buffers should be as standard
The sudden shutdown of businesses in all manner of sectors has underscored just how fragile seemingly healthy revenue streams can be. And, while the government has pulled out all the stops with its furlough scheme, those who are self-employed or directors paying themselves in dividends have been extended far less support. It is advisable to keep at least six months of living expenses as a buffer.
2. Ride out rollercoasters rather than cementing a loss
People pulled huge amounts from the markets during their darkest days of falls, and almost a third never put that money back in. Not only have they lost out on subsequent gains, they have locked in unnecessary losses. If you do not absolutely need to cash in an investment, you may be better off riding volatility out. Paper losses do not have to become real ones.
3. Time horizon and liquidity are all
Time horizon (when you need an investment to pay off) and liquidity (how easy and quick it is to return to cash) are absolutely foundational considerations, but can easily not be given the attention they warrant. Investors found this to their detriment if they were forced to cash investments during the year’s market lows. History tells us that large-scale crises of one kind or another happen every decade or less. Ensure that you have a big enough cash buffer so you aren’t forced to dip into your investment portfolio at the wrong time.
4. Cash can be costly
As those investors who fled the markets and didn’t go back will likely find, cash can actually be a very costly option. Foregone investment returns have to be set alongside the derisory returns on cash. Not only are interest rates still at rock bottom, there is now serious talk of negative territory and depositors even being charged by banks. Couple this with potential inflation and those heavy on cash face a triple threat to the purchasing power of their wealth.
5. Investment strategies need to be shaken up
The pandemic has shaken up how we work and live completely, with wide-ranging implications for the companies, industries and countries we invest in. Even if vaccine breakthroughs herald a return to normality before too long, I think it is safe to say some global megatrends are unlikely to reverse. Experts are advising investors to position for a greener, far more digital future. Online shopping has been one huge beneficiary, for instance: spending is forecast to increase by 30% to hit $184 billion this holiday season. Portfolios might need significant realignment to ensure they are still fit for purpose in light of prevailing trends.
6. Income investors will have their work cut out
Those who rely on their investment portfolio for dividend income will be well versed in what a terrible year this has been. By December, close to 500 companies listed on the London Stock Exchange had cancelled, cut, or suspended dividend payments. With even star dividend payers’ payments on the block, and government paper potentially unattractive, finding relatively low-risk sources of yield has got harder still. This is an area where portfolios might also need substantial revision.
7. Risk-profile is a real consideration
It’s easy to think of risk-profiling as a tick-box exercise and not to see its resonance in real life. This year changed all that, of course. Great swathes of investors have had to concede that their true risk-profile had been obscured. Just as important as your ability to tolerate losses financially is your ability to tolerate them psychologically. Technology can help assess people really accurately today. Insist on a proper reading.
8. Healthy risk appetite has to return
Naturally, many investors were extremely unsettled by the wild market swings, and it looks like this is fuelling a stampede into safer assets. Over a third of investors in the UK have moved money from high-risk to low-risk investments in the past year and double that said they will focus on lower-risk investments in 2021. Their attitude is understandable, but could be dangerous long term. There is a healthy degree of risk investors need to assume, and it might be that you need to assume slightly more to stand a chance of achieving your goals.
9. Many see opportunities to get lucky too
It’s not all about caution growing. Far from it. Various research, and our own observations, confirm that just as many people see opportunities amid the madness. It has been a stellar year for gold and cryptocurrencies, to name but two winners, as well as all the companies able to capitalise on lockdown lifestyles. The key is clearly to spot growth opportunities early on, rather than backing investments that have already shown their best. It’s about precisely when, as much as what, to buy.
10. Money can certainly stay on the move
The wealth management sector rapidly adapted to new ways of working and so firms were able to keep their digital doors open for new business for the duration – often to great effect. Many dissatisfied clients used their extra free time to really dig into getting a better deal, it seems, and a full 28% of Britons dumped a service provider due to poor service during the pandemic. We certainly saw a big leap in the number of people who want to compare investment performance and costs in granular detail, and we hope that sees improved results for many.
Those are just a few of the impressions I’ll be taking away from this most strange of years. I’d be delighted to hear about any that struck readers on the wealth management front too.
In the interim, happy holidays to you all!