What the financial world learnt from 2020

What the financial world learnt from 2020

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Article highlights

  • 2020 was an extremely difficult year
  • In challenging times investors can make emotional decisions which leads to financial loss in the long-term
  • There are important things to remember in market turmoil

Regular readers of our newsletters will know our purpose at Nedgroup Investments is to help our clients achieve their investment goals by being their trusted partner. Never has this purpose been more relevant than today.

We try to make this a reality in two key ways. First, we obsess about our funds so that they deliver over the long-term. Second, we make sure that we communicate relevant information timeously and regularly to help you invest in the appropriate fund and, importantly, stay invested for the appropriate time frame despite the inevitable ups and downs of the market.

Both these objectives are critical for your success - and while neither are easy, I believe the second often receives insufficient attention. As Joe Wiggins, behavioural investment writer states:
"It is difficult to think of a more challenging year to navigate for investors. The potential to make classic behavioural mistakes driven by emotion, short-termism, and skewed risk perceptions never greater. 2020 was a behavioural stress test for investors. It is important to check how we fared."

He identified several key behavioural lessons from 2020:

Making predictions are simultaneously very appealing and extremely difficult. Very few (read "nobody") can forecast consistently with much accuracy. The world is simply too complex and dynamic. At the beginning of 2020 no-one could have predicted the human and economic tragedy of the COVID pandemic. But imagine if some guru had been able to do so. Perhaps they would have been able to predict the dire impact on certain industries, employment and economies, but almost certainly, they would not have been able to conclude that global equities would end the year up more than 15%.

Volatility is an inevitable outcome of investing in equity markets and we should not be surprised by regular bear markets. Since 2000, the market has fallen 20% six times. Acknowledging this should help you prepare mentally to act appropriately. Our ability to manage and survive difficult markets is often as much behavioural (avoiding making poor decisions) as it is financial.

Success in bear markets is really a test of temperament, not intelligence. It is extremely difficult to be rational, unemotional in the face of market turmoil, bold headlines and extreme noise. It is important to be prepared to avoid being overwhelmed because in time of stress it can be challenging to implement even the best intended plans. It is easy to say calmly we will invest more when markets are cheaper (a rational thought) but much, much harder to do in reality within the inevitable context that has made the market fall precipitously (think March 2020). That is why many of the most successful investors, have documented these choices and made them more systematic (e.g. regular monthly investing or pre-determined rebalancing).

Doing nothing is often the best thing. At times of crisis, the urge to act can be very powerful. This is completely natural. But normally remaining calm and sticking to your plan is the best decision. 2020 is another example of how difficult market timing is to get right and how painful it can be to get wrong. For those investors who panicked and disinvested after the market turmoil in March and April, failing to benefit from the remarkable recovery has been devastating to their long-term plans. The SA equity market recovered almost 60% from its lows!

Long-term focus is easier said than done. Having a long-term approach that is aligned to your investment goals is one of the most important attributes of good investors. But, unfortunately, in times of crises our time horizons shrink and we naturally focus on what is happening in the moment.

Understand your own financial behaviour for long-term success
Just as each of us have different personalities, that influence how we interact, see the world and are seen, we also each have different financial personalities. These are influenced our upbringing, our education, our experiences, our current circumstances and our world view. Each of us has have different levels of composure, confidence, impulsivity, desire for guidance, propensity to compare to others and level of comfort with our current and future financial situations.

Being truthful to ourselves and understanding our own financial personality is an important first step in identifying potential pitfalls to our financial success. We can then progress to identifying practical steps to address these pitfalls and leverage our strengths.

Discover your financial personality today
Nedgroup Investments has partnered with award winning UK based Oxford Risk to develop a survey to assist you better understand your financial personality, how this compares to others and - most importantly - practical tips to improve your financial outcomes.

I completed the survey in just over five minutes, and found it provided refreshing, simple and valuable insights. I think you will find it time well spent and encourage you to complete.  You will receive immediate feedback in terms of a personalised report.

Start Survey here

2020 was a remarkable year. I hope we can all learn some lessons to become better investors and in better understanding your financial personality, you will increase your odds of achieving your investment goals.

Happy investing.