2020: Lessons from an exceptional year
The past 12 months have reinforced some basic rules of investing.
It’s been a remarkable year, and along with uncertainty, hardship and disruption, 2020 has dished up some valuable money lessons. Here are my top learnings from 2020.
1. Investments don’t always rise in value
Early in the year we saw big falls in share values and to a lesser extent the property market. It was a reminder that no investment continually rises in value, and it can be very hard to pick the triggers that will see asset markets tumble.
2. Quality investments recover from market downturns
Despite record falls in March, Australian shares went on to record gains of 8.78% in April. This was backed up in November with the highest 1-month gain in almost 20 years. It goes to show that investors who bail during a downturn generally cement losses, and end up paying more to get back into the market later on.
3. Diversifying lowers risk and smooths returns
Few assets markets were spared the impact of the COVID crisis. Spreading your money across a variety of investments remains a simple way to reduce risk and smooth out returns. That’s why I’m such a fan of exchange traded funds. They make it easy to diversify no matter whether you have a small or large amount to invest.
4. Returns vary, fees stay the same
Investment costs don’t fall just because markets take a dive. You’ll likely pay the same fees regardless of whether markets are rising or falling. This is why it’s so important to be mindful of the fees you pay.
5. A cash buffer matters
I’ve said for many years that cash has a place in every portfolio, and in 2020 that mantra proved its worth. None of us know what lies around the corner, and having a stash of rainy day money can be a financial lifeline in an emergency.
As we reach the end of an extraordinary year, I’m delighted to announce that Effie Zahos is joining the board of InvestSMART. Effie is passionate about helping everyday Australians get more from their money, and she brings depth of experience and a consumer focus to the InvestSMART team. For me, it’s one more reason why 2021 is a year to look forward to.
I’d like to wish all my readers a safe and merry Christmas. I’ll be back in January with more tips for a prosperous New Year.