December 2020 - Agile IFA

2020 has been an eventful year for investment markets. Impacted by the Covid-19 pandemic and government responses to this, there have been many valuable investment lessons that will apply in 2021 and beyond.

As the extent of the pandemic became known in March, stock markets around the world suffered sharp falls. In fact, fears of a recession meant the FTSE suffered its biggest fall since the 2008 financial crisis and trading was temporarily suspended on Wall Street as circuit breakers were triggered, according to the Guardian.

Since then, markets have bounced back but continued to experience volatility. The uncertainty of the situation, with governments changing restrictions and support as they try to control the virus, affected markets throughout the summer and autumn.

So, 2020 has been useful in highlighting the investment lessons we should keep in mind.

1. The unexpected does happen

A year ago, who would have predicted that a global pandemic would have occurred? It’s probably not something you’ve ever considered when weighing up investment risks. Yet, it’s had a huge impact on investment volatility and opportunity in 2020.

This year has taught us that the unexpected does happen. We can’t consider every eventuality but preparing for the unexpected can improve your financial resilience. In terms of investing, this may mean having liquid assets or a rainy-day fund you can use if investment values fall. This is particularly important if you’re drawing an income from investments. Having options for when the unexpected does occur should be part of your financial plan.

2. Volatility is part of investing

No one wants to see the value of their investments fall. But volatility is part of investing. When you invest, you need to be aware of the risk that values can fall.

This is why a long-term time frame and goal is so important when investing. Short-term volatility is often smoothed out once you look at investment performance over a longer time frame. It can be frustrating to see that investment values fell in 2020, but when you look at performance over the last five years, for example, you’ll probably still see an upward trend.

3. Diversifying is important

We all know we should diversify our portfolio. Investing in a range of assets, industries and geographical locations can help spread the risk. When one investment falls, another may perform better helping to create balance.

Covid-19 has had a far-reaching impact, with countries around the world affected by the virus. However, some industries have been affected far more than others. Travel and hospitality businesses, for instance, have been forced to close for weeks at a time in many places. In contrast, the pandemic has created opportunities for some firms too. While a balanced portfolio will still have suffered volatility, it can lessen the impact.

4. Financial bias can affect us all

Investment markets have featured in the news more heavily than usual this year, thanks to the volatility experienced. If headlines or talk about the markets meant you considered changing your strategy, financial bias is likely to have played a role.

Financial bias simply means other factors besides facts have influenced your investment decisions. When markets fell sharply at the beginning of the pandemic, an emotional reaction that means you considered taking money out of the markets is normal. However, recognising where bias occurs and limiting the impact is important. Working with a financial adviser can help you with this as you have a professional you trust and one that understands your situation to talk to.

5. You can’t time the market

Finally, the events of 2020 have supported the saying: It’s time in the market, not timing the market.

If you’d tried to guess when to put your money into the stock market and exit this year, you’d probably have ended up making mistakes. Trying to time the market to maximise returns is incredibly difficult, as so many factors play a role. Even investment professionals with a huge number of resources make mistakes.

Rather than trying to time the market, creating a long-term plan and sticking to it is usually the most appropriate strategy for investors.

What to expect in 2021

So, what lies ahead for the next 12 months? With lockdowns and restrictions continuing around the world, we expect further investment volatility as we head into 2021. But if 2020 has taught us anything, it’s that we can’t predict what’s around the corner. Think about your aspirations and build a long-term financial plan around these, including investing where appropriate.

Please get in touch if you’d like to review your investment portfolio for the year ahead.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

‘New year, new me,’ goes the common saying. The start of a new year is often seen as a time to reinvent yourself and make plans towards goals. With 2020 causing so many setbacks and challenges, you may be thinking about setting a new year’s resolution to start 2021 on track.

While setting a new year resolution is common, less than one in ten ends up sticking to them. So, whether you want to exercise more, learn a new skill or make lifestyle changes, setting out a plan can improve your chances of success. If you want to make changes in the new year, here are seven tips to help you achieve your goal.

1. Focus on one thing

When you’re feeling motivated and want to make changes to your life, it can be tempting to make sweeping changes in one go. But good habits can be hard to form. Deciding to hit the gym three times a week, increase your savings and learn a new language on the same day can set you up for failure.

Rather than transforming your whole life, pick an area you want to focus on and work towards this goal. You can always add other aspirations once positive habits have been formed with your first resolution.

2. Be realistic, but make it a challenge

Setting a target is the first challenge of sticking to a new year’s resolution. Make it too easy and you can lose focus, but make it too difficult to achieve and you can lose motivation. You need to be able to realistically reach your goal in the space of 12 months but also ensure that the resolution will have a positive change in your life, encouraging you to keep at it.

Make sure your goal is measurable too. Rather than a vague idea like ‘I want to save more’, set a plan to save a certain amount each month.

3. Break your overall goal into smaller chunks

A new year’s resolution can be daunting when you look at it as a whole. Breaking down a wider goal into smaller segments can help you remain positive and focused throughout 2021. For instance, if you’re hoping to lose weight in the coming year, set monthly targets as well as an end-of-year goal.

It’s a process that can make even larger goals seem more manageable and reduce the chances of you giving up because the final target seems out of reach. Remember to make sure these smaller goals are realistic too.

4. Chart your progress and celebrate your successes

Keep track of your progress towards your goals too. Whether you choose a traditional pen and paper or an app, having your progress noted down can help you get through those times when you’re finding it a challenge. Looking at the hard work and progress you’ve already made can be enough to push you to keep going.

Remember to celebrate when you make progress too. If you’re working up towards running a marathon in 2021, completing that first 5k if you don’t usually run is a milestone. Planning treats for yourself when you reach certain points can help keep you on track.

5. Enlist the help of family and friends

A support system can make all the difference when we’re striving towards goals. Letting family and friends know your plans means they can help you towards your target.

If they’re also working towards the same or similar goal, having a buddy to do it with can make it far more fun and add some friendly competition into the mix. But even if this isn’t the case, loved ones can be valuable support when you feel like giving up. Sometimes, someone giving you a bit of encouragement or even tough love can be enough to boost your motivation, so you keep going.

6. Learn from the past

Have you made new year’s resolutions before? You probably have at some point. By taking some time to review why they were successful and unsuccessful, you can find a way of working that’s right for you. There’s no ‘right’ way to work towards a goal, but by understanding why you’ve given up or didn’t meet expectations in the past, you can set out a plan that matches your mindset.

7. Don’t give up when you slip up

Finally, making long-term changes is hard and good habits take time to stick. Even the most dedicated can experience a setback. Don’t let a small slip up knock you completely off track. It can be frustrating, but look at why you’ve missed a target and learn from it. Finding a way to keep going when things don’t go to plan is often the difference between success and failure.

If you’re setting financial goals this year, please get in touch. Whether you want to save more, start investing or plan your retirement, we can help you incorporate these into your financial plan to set a path for success.

Stock markets in 2020 have been characterised by volatility and uncertainty. If you’ve made financial decisions based on your feeling towards this, it could have cost you money.

Whenever we make a decision, we have to weigh up the different options. While reasons and facts should be the basis for any decision you make, emotions play a role too. Where this happens when making financial decisions, this is called financial bias. It can mean you end up making decisions that aren’t appropriate for you.

In recent months, as markets have experienced volatility and economic uncertainty has featured in the news, this may have affected the decisions you’ve made too.

Moving to cash due to Covid-19 cost investors 3%

According to behavioural finance experts Oxford Risk, investors that responded to Covid-19 uncertainty by moving more of their wealth into cash could have missed out. By switching to cash for ‘emotional comfort’ it’s calculated that investors have missed out on returns of 3% or more a year.

Separate research also suggests that investors moved more of their wealth into cash in response to Covid-19. In the first half of 2020, UK households put away £77 billion in cash, taking the total amount saved in cash accounts to £1.5 trillion. While a cash account to cover emergencies is advisable, it’s estimated that nearly £1.2 trillion of this cash isn’t needed for contingencies.

With cash accounts currently offering low-interest rates, it’s estimated that UK households have missed out on £38 billion in potential investment returns.

While investing does come with risk, it can help your money grow at a faster pace than when using a savings account. However, you need to invest with a long-term time frame, a minimum of five years. This provides an opportunity for short-term volatility to smooth out. Investing for a short period means there’s a higher chance that you could lose money due to short-term downturns.

There are many reasons investors held more of their money in cash during the first half of this year. But for some, financial bias will have played a role.

For example, information bias occurs when investors evaluate information, even if it doesn’t relate to their situation. It makes it difficult to assess what information is relevant. The sheer amount of information can be overwhelming. During the pandemic, investors have been bombarded with news, forecasts and opinions about what will happen. With much of this coverage negative, it’s natural that some investors will have had an emotional reaction and decided that cash was safer.

Trying to time the market provides an opportunity for financial bias

It’s not just a trend that is having an impact due to Covid-19 either. When the markets are performing well, it can be tempting to increase how much of your wealth is invested. In contrast, it’s common to want to move your money to ‘safety’ at times when markets are performing poorly or experiencing volatility.

However, this can mean you end up buying assets while prices are high and selling at low points. Oxford Risk estimates this type of financial bias can cost investors an average of 1.5% to 2% a year over time. Over a long-term investment strategy, financial bias can end up costing you significant sums.

While it can be tempting to move money in and out of investments to maximise returns, trying to time the market is difficult. As the above averages show, you’re more likely to miss out on returns than to increase your portfolio’s value. For most investors, a long-term investment strategy is appropriate.

Minimising financial bias: Stick to your long-term plan

Creating a long-term plan based on your goals and sticking to it can help you minimise the impact of financial bias. That can be easier said than done, though, especially at times of uncertainty. Working with us can help you here. A financial planner will be able to help you understand your long-term financial positions and act as a second pair of eyes when you want to make changes. It can mean financial biases can be highlighted and discussed.

That doesn’t mean you should never make changes to your financial plan. After all, circumstances and goals do change, and your financial plan may need to change to reflect this. However, this should be driven by long-term aspirations and be based on evidence.

Please contact us, if you’d like to go through your financial plan and investment strategy.

Please note: The blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.