The Week: The investment lessons we learned in 2020

2020 was a difficult year, but investors shouldn’t waste the opportunity to learn from it. A crisis may be painful, but it can help create better investors.

  • Crises emerge from nowhere and can seldom be predicted.
  • However, those who focused on quality fared well
  • The ‘defensive’ assets should prompt a re-think for many investors

Most of us will be glad to see the back of 2020, but it is, nevertheless, worth learning some lessons from a horrible year. There was lots of investment wisdom to be gleaned from     the past 12 months. We explore the most important areas:

Crises come out of nowhere – in 2020, it was difficult to disagree with those who suggested that any form of prediction is little more than a guess. The pandemic was on no-one's risk radar and, if anything, the year had started with considerable optimism about the economic outlook. Many people were still looking backwards at the last crisis, worrying about the banks or trade tensions before the pandemic blew everything out of the water.

Risk management matters – While no-one was prepared for the pandemic, those that were prepared for a risk event of some kind were certainly better off. This was the moment when a quality focus came into its own. In a distressed climate, those companies with strong balance sheets and a strong market share were able to capitalise on their positions, while weaker competitors flailed.

There is political risk in developed markets too – for many years there has been a view that political risk is an emerging market phenomenon. Brexit showed that wasn’t necessarily the case. In 2020, the upheavals in the US political system were also felt in the price of US assets. Financial markets started to get jittery as it looked like President Trump may not go quietly even if he lost the election and rallied significantly when it became clear that his legal challenges were going nowhere. Of course, because it was the US, everywhere else also felt the pain.

The error of panic-selling – Panic selling at the height of a crisis is always a bad idea. In 2020, it was an awful idea. Markets fell quickly and savagely, but got much of their pain out of the way in a matter of weeks. From there it was a near-uninterrupted recovery for the remainder of the year. For those who had sold out amid the March/April weakness, there was never a good time to jump back in. At no point did there appear to be any economic certainty and yet markets continued to rally.

Investors’ perception of ‘defensive’ needs to change – For many years, it has been received wisdom that technology stocks are for the good times, those moments of economic expansion when everything is going swimmingly. It turns out that they are also pretty defensive in a crisis. In contrast, many of the stocks that should be defensive – energy, utilities, consumer – were uncomfortably volatile. The traditional view of defensive versus risky needs a rethink.

Let’s cross-fingers for a better 2021.