Mar 15, 2021 | EWAN ROSIE
During the last few weeks we’ve all started down a new path – the one laid out by the government to help the country move out of lockdown.
Even though we’re taking small steps, and rightly so, at CPW we’re feeling positive and excited about what’s to come. We can’t help but think back to a year ago when the lockdown journey was just beginning and when global stock markets were pretty much at their worst point of the pandemic.
Every market crisis is different from the last, but there are enduring lessons which we believe can make us all better investors…
1. Markets go down as well as up. After the Global Financial Crisis, investors were treated to a long and almost interrupted run of rising equity, bond, and property markets. It seemed as if everything always went up. Of course, in the early part of 2020 we were reminded this is not always the case! Some equity markets fell more than one third of their value. This is a great reminder that there will be downs as well as ups! Investors do get rewarded for sticking it out in the long run even if it’s not always easy.
2. Short-term pain does not become long-term pain unless you sell. Global markets have recouped all of their losses (and more) since the start of 2020 to the start of March 2021. If you panicked and sold when markets fell a year ago, you wouldn’t have been on the receiving end of those gains. Bailing out of a long-term strategy can cost you, both in terms of your bank balance and your emotions.
3. Fads, trends, and social media tips are dangerous to your wealth. In the past few months, we have seen extraordinary share price rises of many fast growing companies. Tesla’s stock price rose from $121 a year ago to a high of $883 on 25 January 2021. Social media hype around stocks like GameStop and the ‘enthusiasm’ of online retail investors pushed some stocks ‘to the moon’. Yet most turned out – or will turn out – to be meteorites that come crashing back down! Owning stocks is a long game. Let others take the losses. Remember that owning a diversified portfolio means that you already own many of tomorrow’s winners.
4. Inflation may not be dead. For some time, inflation has been pretty flat. Yet, the huge levels of government stimulus – not least the $1.9 trillion (i.e. $1,900,000,000,000) package in the US – risks fuelling inflation. As we’ve all learnt the status quo doesn’t last forever!
5. Bonds don’t always go up. Bond yields have been falling for around 40 years to historic lows, so as the fear of rising inflation creeps in and bond yields go up, investors might see them rising in their portfolio – something they haven’t experienced before. Owning shorter-dated bonds helps lessen the pain as investors benefit more quickly from the rise in yields.
6. Gold is not a good short-term fix. Just as we’re potentially experiencing a rise in inflation, gold prices have been slumping from above £2,050 per ounce in August 2020 to below £1,700 per ounce today. Don’t get trapped in the myth that gold prices always rise with inflation!
These lessons lead us to some obvious conclusions about portfolios – balance and variety are key but taking advice from social media or the ever-changing news headlines should not play a part in your decision-making process.
As we put our faith in the slow and steady route out of lockdown, we should also apply the same logic to our investments. We survived what the markets threw at us in 2020 and we’ll survive whatever comes next!
If you have any questions get in touch with your usual CPW contact or book a no obligation chat by clicking here.
Past performance can’t guarantee what investments will do in the future. The value of a portfolio can go down as well as up, so there’s a chance you’d get back less than you put in.