HAPPY RETURNS - HOW TO INVEST IN TIMES OF CHANGE
Roy Davidson, 21 December 2020
As we move into the new year, it is a time to reflect on a year without precedent in recent history.
It is a year most people will be happy to see the back of. COVID-19 emerged in the early months, spreading from country to country and forcing governments around the world to close their borders – something unthinkable even just a year ago.
Investors were rattled, and markets experienced one of the sharpest falls in history. However, with central banks and governments the world over moving to support markets and economies by any means necessary, markets have since recorded one of the fastest recoveries in history.
And just to cap things off, we’ve had a few elections to deal with, including a heated and divisive contest in the US.
There is no doubt we are living in interesting times. Naturally, we’ve had many pose the question of how they should invest during a period of such great change.
The more things change, the more they stay the same
Some things are certainly different. COVID-19 has accelerated several structural trends such as the moves towards e-commerce, digital payments, and flexible working. Other sectors, however, are feeling the brunt of changed consumer demands and government restrictions. This has created new opportunities and challenges for investors.
Interest rates have also fallen to historic lows, prompting many to again question where they can park their cash and earn a decent return.
However, the more things change, the more they remain the same. The golden rules of investing are as relevant now as they were last year, last decade, or last century:
1. Start as early as you can. The biggest barrier to investing is often getting started. But investing early is the single best thing you can do as an investor - time is your friend. You also don’t need much money. We are big advocates for investing in installments. This means contributing an amount you can afford each week or month. Basically, think of investing as you would a savings account. Before you know it, you’ll have built a nice portfolio.
2. Have a plan and stick to it. Your portfolio needs to match your situation and your goals. The last thing you want is to have a portfolio that is too risky and have to call on your money (say for a house or retirement) when the market is going through a rough patch. Conversely, if you have a long-term horizon, you have plenty of time to recover from such events.
3. Diversify, diversify, diversify. This is one of the easiest things you can do, but the benefits can be huge. No one knows for sure what will happen in the future, but having a diversified portfolio, which includes international shares, lowers your overall risk and improves the likelihood you’ll be a successful investor. It will also ensure you can sleep soundly at night.
4. Invest in quality. This has always been one of our core beliefs, but this is more important now than ever before. What do we mean by quality? We mean those companies that will still exist in 50 years’ time, those that have unique products, intellectual property and sustainable competitive advantages, and those that have a history of producing returns for shareholders.
5. Don’t be afraid to dip into your capital. Ok, this one is a bit of a change and probably only relevant to those relying on the income their portfolio generates. But with interest rates where they are, it’s hard to generate sufficient income from portfolios at present. However, the flipside of low interest rates is that asset prices have gone up. If you need income, dipping into some of that capital is a valid course of action.
These things may sound predictable, but with the benefit of decades of experience navigating markets for our clients, we believe they are more important now than ever before.