Takeaways from roller-coaster ride for investments in 2020

In the year 2021, investors will get to apply the experiences that a tumultuous 2020 gave them. It put a face to many of the good advice they have been inundated with over time. Investors yearned for a better-diversified portfolio as equity markets sank in March 2020. Building and replenishing an emergency fund is no longer seen as savings wasted, and adequate insurance has become a top priority for most households.

The performance of asset classes in 2020, in the midst of a pandemic and an economy that had little to cheer even before it was hit by the lockdown, threw up some surprises and some expected results. Gold continued its impressive run in 2020 buoyed by a flight to safety and the loose capital policies of central banks around the globe. Indian equities too benefitted from the liquidity glut, overcame poor economic fundamentals and ended up on top of the asset class heap.

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We look at three takeaways for investors that will make their investing journey better in 2021.

Stick to the Basics

Investors who stuck to the basics found it easier to ride the roller-coaster of asset class performance in 2020. “The basic principles of personal financial management should hold good even in the face of disruption. This includes building a safety net for liquidity and an asset allocation aligned to the investor’s goals,” said Prableen Bajpai, founder, FinFix Research and Analytics Pvt. Ltd, a wealth management firm.

When investments are made on the bedrock principles of diversification across asset classes and rebalancing is done based on the time horizon available for goals, then investors feel far more confident of weathering interim shocks. They are less likely to make decisions based on short-term events that, however severe, may be far from helpful to long-term goals. “The most efficient portfolios are those that have been built to a well-thought-out asset allocation and investment plan and need no intervention in response to short-term market events,” said Bajpai.

Build immunity

Build portfolios that are prepared to take the sting out of volatility and unexpected events when they occur. The best way to do it would be to build a well-diversified portfolio across asset classes that will keep the overall returns resilient over different market conditions.

“There are likely to be events that cause extreme uncertainty. Build a crisis-proof financial plan. Maximizing returns is not the primary goal of a financial plan. It is to bring in an element of certainty to finances, irrespective of external events. This means that allocation must be made for liquidity, stability and growth,” said Suresh Sadagopan, founder, Ladder 7 Financial Advisories, a Sebi-registered investment adviser. “In May we showed each of our clients how their portfolios were equipped to deal with their immediate liquidity needs, requirement for additional funds in case of contingencies and their goals as they come up for funding,” he added.

As the asset class performance quilt shows (see graph), each period may exhibit conditions suitable for a different asset class to step up. Rebalancing the portfolio to targeted asset allocation is an efficient way to book profits in an asset that has run up and to check the risks when the prices turn down.

It also allows an investor to benefit from a run-up in an asset class that has been an underperformer. “Rebalance the portfolio when it is not in sync with the goals. Use periodic investments to build exposure to asset classes,” said Sadagopan.

Bajpai pointed to using asset class run-ups as opportunities to clean up the portfolio since it allows investors to exit from investments at a profit when they are no longer suitable.

Tune out the emotions

Tuning out greed and fear from investment decisions will go a long way in protecting goals from missteps. Bring discipline through periodic investments, maintaining a suitable asset allocation and following well-defined processes for evaluating and committing to an investment.

A long-term perspective will help investors see that there is no compulsion to do something different because of short-term events. “Most of the people who regularly save and invest will be able to meet their goals with just a return of 9%. When that is so I see no reason to expose them to the risk of very volatile investments like small-cap funds,” said Sadagopan. “The experiences of the year gone by have reinforced basic financial prudence of spending, saving and borrowing,” said Bajpai. “It is best to keep investments simple and straight forward. But sometimes when investors want to get adventurous they should do it in a small way so it does not impact their goals. There will be lessons learnt from that too,” she added.

The challenges of 2021 may be quite different from what investors faced last year. But the experiences of last year would have equipped investors to better navigate them so that there is no lasting harm done to their goals.