2020: Lessons from an exceptional year
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.
Frequently Asked Questions about this Article…
It's crucial to remember that investments don’t always rise in value because markets can be unpredictable, as seen in 2020 with significant falls in share values. Understanding this helps investors manage expectations and prepare for potential downturns.
Quality investments can recover from market downturns as demonstrated in 2020 when Australian shares rebounded with significant gains after initial record falls. Staying invested during downturns can prevent cementing losses and allow investors to benefit from eventual recoveries.
Diversifying your investment portfolio helps lower risk and smooth out returns, especially during market disruptions like the COVID crisis. By spreading investments across various assets, you can reduce the impact of any single market downturn.
Investors should be mindful of investment fees because these costs remain constant regardless of market performance. Being aware of fees ensures that you are not overpaying, which can affect your overall investment returns.
Having a cash buffer is important because it provides financial security during emergencies. In 2020, having cash reserves proved valuable as it allowed investors to manage unexpected financial challenges without liquidating investments at a loss.
Exchange traded funds (ETFs) proved beneficial in 2020 by offering an easy way to diversify investments, regardless of the amount invested. This diversification helped mitigate risks during the volatile market conditions experienced throughout the year.
Everyday investors can learn that market fluctuations are inevitable, and it's important to stay invested, diversify, and be mindful of fees. These strategies can help manage risks and take advantage of market recoveries.
Effie Zahos is a financial expert passionate about helping Australians maximize their money. She is joining the board of InvestSMART, bringing her experience and consumer focus to the team, which is expected to benefit everyday investors.
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