Four investing lessons from 2020

2020 was a turbulent year to say the least. By February, COVID-19 cases were getting closer and closer to home and by March essentially the whole world was in lock-down. “Unprecedented” was the buzz word of the time and the share market did what it so often does when there are times of extreme uncertainty… it crashed. In the US, the S&P 500 Index dropped 34% in just 33 days between February and March. At home (Australia) the S&P/ASX200 Index fell by a whopping 36.5%. For many, this was another layer of stress to add to the daily hardship that was COVID-19.

Unfortunately, for the investors who sold their positions during 2020 to ‘protect’ their money, ironically, this did the opposite. History tends to repeat itself, and just like every other stock market crash, the market has now fully recovered. The Australian market currently sits slightly above where in was pre-COVID and the US market is at record highs, up roughly 25% of what it was in February 2020. So, what can we learn from 2020?

Do not panic!

Arguably the most important part of investing is the art of acting free of emotions when making decisions. This is not easy! March of last year was a time like most of us have never seen. The toilet paper bandits are a perfect example of human ability to act irrationally during times of distress. The same goes for investing, if you have a long-term time horizon for your investments, selling during a crashing market will only realise your losses from paper to cash. Don’t sell if you don’t have to.

Diversify

As the saying goes, don’t put all your eggs in one basket. A well-diversified portfolio is what is achieved when assets are allocated effectively across differing sectors to reduce sector risk and stock specific risk. To use an extreme example: imagine if you went in to COVID with a portfolio full of tourism shares, it would not be pretty. Compare this with a professionally diversified portfolio of multiple shares across varying sectors. In this case, if a share or even a whole sector tanks your losses will be mitigated across the rest of the portfolio.

What would you do in hindsight? BUY

Hindsight is good, but foresight is better. Remember this for the future: every stock market crash in history has recovered! The COVID-19 crash presented a massive buying opportunity to score premium investments at a discount. From mid-March 2020 to now (June 2021) the Australian market is up 45% and the US market up 84%. That is a staggering return for only 15 months. Entering buy positions during the panic of COVID or any crash is not for the light-hearted and may not be for everyone, so:

Talk to your Financial Adviser

Experienced financial advisers have just what you need, experience. From the dot-com bubble, to the downturn of 2003, to the GFC, an experienced financial adviser will have worked during at least a few market crashes and will know what to do. They will be there to cancel out the noise of fear and doubt that inevitably comes with uncertainty and rather, provide rational tailored advice to deliver clarity on your financial situation.