Unprecedented, social distancing, lockdown, work from home, zoom, new normal. These are just a few buzz words that can be used to describe the year. It was a year in which the only story in the spotlight was the novel coronavirus COVID-19 and the havoc that it wreaked on country’s citizens, economies, and even financial markets. Despite a pandemic and severe volatility earlier on in the year, investors that kept calm enjoyed a profitable year in their investment portfolios.
The year provided many opportunities for us to re-design our habits and routines. Now is a great time to re-think and review our financial habits and we will discuss important lessons from 2020 that investors can benefit from long-term.
*Equity Indices - FTSE Global Indices in CAD, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index based on end-of-day data for the Total Return Index as at market close as at December 31, 2020
When we look back on 2020, we will all remember a year of lockdowns, masks, and social distancing. Given these exceptional times as an investor, looking back, it’s important to reflect on the major developments. Markets started a steep decline in February and the decade plus bull run finally came crashing down to a bear market. Central banks and fiscal policy makers reacted swiftly, and what resulted was the shortest bear market in history lasting only 33 days. Then, across asset classes, markets closed the year in the green broadly and even amongst the pandemic. There are many important lessons that can be garnered from this:
1. Markets are forward looking
While increasing data and news was being released about the novel coronavirus at an increasing pace during Q1, markets had been absorbing the data and asking “what are the long-term implications of this health crisis?” Markets began their descent in late February, Premier Ford declared a state of emergency on St Patrick’s day in Ontario, and just a few days later markets hit a bottom on March 23rd before starting their recovery. This is an important reminder that markets do not care about what’s happened in the past and what’s happening today, they are only concerned about what the future will look like. It’s important to remind yourself that your thoughts are not unique and are therefore already priced in.
2. Investing is a Behavioural Discipline
There are countless biases that investors are prone to exhibit unconsciously; by sticking to your plan you can avoid falling victim to these pitfalls and increase the likelihood of achieving your financial goals. One of the worst calls an average investor can make is the decision to move to cash during periods of elevated volatility as they are worried that the sky is falling. This is a classic example of market timing and there is a lot of evidence that shows that market timing strategies are not profitable ex-post. They are so difficult to get right – and selling can often happen close to the bottom – and the investor typically only buys back in after the market has recovered its losses.
Often investor questionnaires ask how you would react if the market lost significant steam. Times like Q1 are a good time to re-visit those questions and reflect on your answers to those questions. If you said you would buy because securities are effectively on sale at a discount, or even if you answered, “I would do nothing” and essentially stick to your plan, it’s so important to follow through on these statements as they are great strategies.
3. Stick to the Basics
Global diversification, pre-authorized contributions and a well-defined rebalancing strategy will help you achieve your financial goals. If you have these in place the behavioural strategy of tuning out noise and maintaining a long-term mindset will serve you well.
As 2021 progresses we hope to see economies safely re-open. We believe that those who apply the lessons from 2020 to their investing moving forward will be successful.
We wish you a healthy New Year!