The Rule of Six – 6 Investment Lessons for 2021

While the landscape was wildly different, the investment lessons from 2020 were not vastly dissimilar from 2019. Who knows what 2021 will bring, but there is a good chance some of these lessons will again be prominent and require attention.

Stay invested. Again


After a torrid final quarter of 2018, many investors sat out 2019 to their cost, and missed out on significant gains as markets rebounded. As the pandemic struck in 2020, being fearful about investing was understandable. But during the year global and US markets recovered all their losses and more, and the FTSE 100 bounced back somewhat, too – underscoring how difficult it is to try and time the market and why you should stay invested over the longer term.


Don’t gamble (on bust companies, or other dubious trends)


There was a moment in 2020 that perfectly encapsulated some of the craziness of the mood – speculators were talking up and buying shares in Hertz, a company that had effectively gone bust.


While we generally advocate against the perils of investing solely in single companies we suggest that your future is too important to gamble with at all. By all means, have a flutter with money you can afford to lose, but to avoid your long-term future being frittered away, it’s best not to take unsuitable risks to try and recoup any prior losses.


Shop local, but not for income


To put it mildly, those seeking a consistent income faced a challenging year in 2020 – with dividends being slashed across the board. While it feels intuitively right to invest in income producing assets if you need an income, it’s worth examining options such as a total return approach, as we do here.  


A sensibly constructed portfolio targeting total returns – including capital gains and dividend income over a given period – can focus on areas of value and embed protection, rather than solely targeting high yields. Such portfolios blend returns from global stock markets and bonds to provide smoother returns over time while cashflows are drawn from the combined investment pot.


Active management hasn’t reassured investors – not for the first time


According to their avid supporters, the extreme turbulence in markets in the first half of the year would typically provide the ideal conditions for active managers to outperform. This was not the case – as this FT report highlighted and as we also discovered in analysing three of the most recent downturns.


Has active management had its day? Who can say – but there is no evidence it can recapture its former glory.


Being globally diversified is not such a stretch


We should recognise our inability to predict the future. And act accordingly. From year to year different assets deliver different levels of returns – emerging market equities might perform best one year, government bonds the next. But while it is difficult to assert where the likely winners will be, we can assign a relative preference for different asset classes and regions through careful investment analysis, and efficiently construct a portfolio to withstand various different economic and market scenarios.


This is why the smart investor should be globally diversified, in 2021 and every year: to capture much of the gains across assets, while protecting somewhat against considerable losses.


Politics matters, but mitigating uncertainty is more important


While incendiary political firebrands and some US market commentators lamented the potential downside to a Biden presidency, US stock markets shrugged it off, taking confidence that a split Congress reduces the likelihood of anti-corporate policies.  This positive outcome for markets reinforces the case that major uncertainty (economic, political or social) is far more damaging to market performance than shrieking political pundits.


Please note, the value of your investments can go down as well as up.

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