In media forecasts for 2020, a global pandemic and the worst recession since the 1930s weren’t high on everyone’s list of threats. But even had these events been foreseen, who would have tipped global equities to reach record highs a year later?
After many markets hit record highs in February, they suffered a gut-wrenching slide of more than 30% in five weeks. The recovery from April was just as dramatic. By the end of 2020, the S&P ASX 200 was down 1.45% and the MSCI World index up 14.33% for the year. Investors began to anticipate an economic recovery and were buoyed by news that three different vaccines may soon be available.
The sheer volatility in prices mirrored our emotional swings. After all, this was a health crisis first and foremost. By year end, over 1.8 million people had died from or with COVID-19 and nearing 85 million cases had been reported worldwide.¹
On top of the medical anxieties were threats to livelihoods. With entire industries and economies severely disrupted by the pandemic, governments and central banks announced unprecedented levels of policy stimulus. Even so, the International Monetary Fund in October projected a historic global GDP contraction of 4.4% in 2020, the worst annual plunge in activity since the Great Depression.²
COVID-19 also changed the way we lived and worked. Our homes became offices and classrooms. Time formerly spent commuting was now absorbed with work and study. For some, the working day started much earlier. For others, it ended later. For many it was both!
Perhaps what was most striking is how well we adapted in the face of significant economic and social disruption. Previously unthought of travel restrictions, social distancing, mask wearing, and contact tracing apps are now facts of life. The urge to protect ourselves and our loved ones from an external health hazard was such we were prepared to give up some freedoms.
Three key rules around good investment practice were reinforced as well.
The first rule we were reminded of is that markets are not perfect or that they go only in one direction. When there is a lot of uncertainty, there will be a lot of volatility. But trying to second-guess prices is futile. Even if you could forecast news events like a pandemic, you still have to work out how markets will react.
The typical experience of the speculator is one of temporary profit and ultimate loss. - - Benjamin Graham
Second, diversification was again shown to be critical in improving the reliability of outcomes. Some stocks and sectors were more exposed to a pandemic that brought travel to a virtual halt and reduced human contact. Airlines, cruise ships and tourism-related stocks were all hard hit, as were traditional bricks-and-mortar retailers. On the other side, Facebook, Amazon, Netflix, Google – affectionately known as the FANGS – online retailers, and some healthcare stocks did remarkably well. In Australia, gold and iron ore miners bucked the overall downtrend. Being broadly diversified matters because it reduces stock or sector specific risks and is critical in reliably capturing the return premiums you are targeting.
Third, rarely has the value of discipline been demonstrated so vividly. When volatility turned so extreme in late March there was a temptation among many to retreat to cash. While there was no denying the anxiety we felt, trying to get off the rollercoaster in the middle of the ride was only likely to make matters worse. Well-advised investors instead learnt to hold on tight and stay focused on their destinations.
Of course, there inevitably will be further challenges ahead. The pandemic is still with us. While there has been encouraging news on vaccines, hurdles need to be overcome. While many economies have bounced back from the initial shock, scars remain. And there may be some other challenges or events that comes along. Markets may become volatile again, as is their nature.
The most effective personal response to external health and wealth threats is to focus on what we can control. In health, it is things like regular exercise, a balanced diet and of course practising good hygiene. In wealth, it is broad diversification, rebalancing, accepting that markets will do what they do, and most importantly staying disciplined.
That’s the best lesson 2020 gave us.
If you have any questions about your investment portfolio or we can be of assistance with any financial matter, call us on (03) 99350970 or email email@example.com
¹World Health Organisation, COVID 19 Dashboard.
²World Economic Outlook, IMF, Oct 2020.
We acknowledge the assistance of Jim Parker in writing this article. Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice from WARR HUNT prior to acting on this information. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product. Past performance is often not indicative of future results.