Ending 2020 on a positive
At the time of writing, it’s looking highly likely global equities will finish the year slightly up on where they started. Now that’s something none of us could’ve imagined back in March as stock markets fell with frightening speed in response to the onset of the pandemic.
We can’t deny it’s been a hard year and there’ve been some serious ups and downs for investors. But as we look likely to finish on a more optimistic note, the importance of controlling your emotions and thinking long-term is obvious.
When markets rapidly rise or fall, emotions kick in and this can lead to poor decision-making. Being tempted to act on market falls – or even the idea of a fall – is extremely risky and likely to harm your portfolio’s returns.
2020 is a classic example of how damaging this behaviour can be. The market fell around 25% but is now above its starting point. A similar thing happened in 2016, a year that started with a market fall, had the Brexit vote but ended almost 30% up.
The chart below shows the annual return of developed and emerging markets in aggregate (the orange column) and the intra-year fall from that year’s market high (the blue dot):
Source: Morningstar Direct via Albion Strategic
You can see how a long-term investment approach pays off. Investors who managed to stay the course received an annualised return of 11.7% over a period of nearly ten years. Meaning their assets doubled every 7 years or so – a great outcome!
So, the message for 2020 isn’t any different to what we’d tell our clients in any other year – don’t act on emotion, take a long-term investment approach supported by the evidence and if you find this approach difficult, seek the support of a professional who can help steady the ship when things get choppy.
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.