Investment is a long-term prospect and we often talk here at Hartsfield about the need to stay calm and ‘ignore the noise.’ Formerly this noise was in the form of international trade wars, US elections, and Brexit.
The ‘noise’ in 2020 was louder and harder to ignore. The coronavirus pandemic has had a massive impact on all our lives, infringing on our personal freedoms and endangering our health, as well as affecting the global economy.
The short-term volatility of March 2020 has been well documented. The FTSE 100, the Dow Jones, and the S&P500 all had their worst days in decades. With the pandemic still a part of all our lives, the markets aren’t yet at pre-pandemic levels, but they have recovered.
2020 was a challenging year, but there are things we can learn from it too. Here are five investment lessons to take from 2020 if you’re looking to invest this year.
1. The market has recovered from pandemics before
The scale of the coronavirus pandemic is unprecedented in our lifetimes, but health crises have impacted the stock market before. This graph from Charles Schwab shows the effect of earlier epidemics on the MSCI Index.
Short-term volatility is to be expected, but markets recover. The general trend of the markets is an upward one.
2. Investment is for the long term
When you take out an investment it should be with a long-term view in mind. Whether you’re investing for your own retirement, or you’re hoping to help children or grandchildren onto the property ladder or through higher education, it is important to have a goal in mind.
To make investing the right choice for you, this goal should be at least five years away. It should be your focus and the constant that you look to when making your investment choices.
Your attitude to risk will be directly linked to this goal. If your investment is for retirement still decades away, you can afford to take more risk. A child approaching 18 will need your money sooner and your risk threshold might be lower.
A shorter investment period means less time to recover from the short-term market blips that will occur at some stage in your investment term. A longer investment leaves more time for recovery and a better chance of taking advantage of the markets generally upward trend.
However the markets perform each year, the important thing is to remain committed to your goal. If you have the right portfolio balance, a comfortable level of risk, and understand your timescales, you have all you need. If your goal doesn’t change, your investment choices needn’t either.
3. Stay calm… and stay invested
Staying calm and avoiding kneejerk reactions when markets fall is crucial to the success of your investment.
As you saw in the MCSI graph, there have been many times over the last 50 years when an investment might have been sold at a loss. And yet the general upward trend is clear. The FTSE 100 over the last 12 months shows a similar, albeit less pronounced, tendency to rise.
It is clear that an investment sold at the height of the market uncertainty in March would mean missing out on returns as the market recovered.
Source: London Stock Exchange
Staying calm, ignoring the noise, and managing your emotions are the lessons to take from 2020. Put another way, it’s time in the markets, not timing the markets that has the biggest impact.
4. The impact of lost days
The impact of missing the market’s best days is illustrated in this graph showing the hypothetical growth of $10,000 invested in the S&P500 Index from 1 January 1980 to 31 March 2020. It assumes dividends were reinvested but does not include tax deductions.
Notes: The hypothetical example assumes an investment that tracks the returns of the S&P 500 Index. “Best days” were determined by ranking the one-day total returns for the S&P Index within this period and ranking them from highest to lowest. Past performance is not a guarantee of future results. Your own investment experience will differ, including the possibility of losing money. Source: Bloomberg, as of 3/31/2020
Missing even the best five days over a forty-year period could see you miss out on over $250,000 of growth. This rises to nearly $650,000 were you to miss the best 50 days.
5. The importance of financial advice
The key investment lessons to take from 2020 are:
- The general trend of the markets is an upward one
- Don’t panic… and remain invested
- Focus on your long-term goals
And yet, knowing that short-term blips will occur doesn’t necessarily make it easier to keep your head when they do. The unprecedented nature of the ‘noise’ this year has made that particularly difficult.
The coronavirus pandemic has posed a threat to our freedoms, our livelihoods, and our health. Uncertainty makes staying non-emotional difficult, but advice can help.
At Hartsfield, we understand market trends and have seen market volatility before. The financial plan we help you put in place will have your long-term goals at its heart. We can help guide you to make sure that your goals stand the very best chance of becoming a reality.
Get in touch
Please get in touch if you would like to start investing, you have any questions about your current investments, or you would like to check-in for your regular review.
The value of your investment (and any income from them) 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. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.