Investment lessons from 2020 to take with you into the New Year

It’s safe to say nobody could have prepared for what has happened over the past 12 months, in terms of managing their finances, but also their life in general.

Thousands have lost their jobs, millions were furloughed, and sadly many have lost their lives due to the pandemic.

Throw into the mix the instability caused by ongoing Brexit negotiations which only came to a conclusion on Christmas Eve, as well as severe market turbulence, and UK investors have seen the most rollercoaster year since the global financial crisis.

Turbulent year: Here’s hoping 2021 will bring more positive news for people’s financial and general wellbeing

It’s therefore not surprising that asset managers, banks and investment banks are more cautious and the usual investment outlooks shared at the end of each year are more than vague than ever.

Likewise, investors and savers are probably feeling more nervous about where to put their money, whether that’s in an investment account, tied up for years in an Isa or just under the mattress.

While nobody can predict what 2021 will bring, here are some tips and lessons from industry experts to help best prepare for whatever it may be.

Prioritise your savings 

Emma-Lou Montgomery, associate director for personal investing at Fidelity International, says savers should make sure to utilise their annual Isa allowance before anything else.

She says: ‘At the start of 2020 life looked very different to how it looks as we head into 2021. And perhaps the lesson we have all learned is that when the worst does happen, it comes without any notice at all. 

‘That is why always being as prepared as you can be is essential when it comes to your financial planning so make sure you use your annual Isa allowance. 

‘Each person can save up to £20,000 in an Isa in the current tax year, enabling you to build a substantial pot of money that will grow over time and won’t be touched by the taxman. 

‘The current tax year ends on 5 April 2021, so take advantage of your Isa allowance before then.’

FIdelity’s Emma-Lou Montgomery said savers should make the most of their Isa allowance

Keep cool in a time of crisis 

While easier said than done, Will Hobbs, chief investment officer at Barclays Wealth Management & Investments, advises trying not to get spooked by market reactions or sharp falls.

‘The anticipatory nature of the capital markets often means that the worst declines happen before the real economic damage has shown up in the data,’ he says.

‘Shocking and disorienting headlines blare from TVs and it’s easy to think about cutting your losses, converting your investments to cash and moving on. 

‘The reality is that, while the market descent was rapid when set against most prior equity bear markets, so too was the recovery.’  

Your new relationship with risk

The coronavirus pandemic has thrown an entirely new spotlight on risk in the past few months. 

Never before have day-to-day things like going to the supermarket, eating out, or meeting up with friends and family required the risk assessment skills we’ve all had to develop since the start of the year.

So, as Emma-Lou highlights, we are all now probably getting much better at analysing risk and deciding how to manage it, without even realising it, something that could come in handy in other areas of life. 

She adds: ‘When it comes to investing, “risk” is a word that tends to loom large. How many times have you heard someone say “Oh, investing’s too risky for me,” or “I don’t like to take any risks with my money”?

‘We cannot eliminate risk altogether, in investing or in life, and we all know that. 

‘But learning to assess the level of risk you need to take and balancing those risks against the potential rewards available to you, will stand you in good stead to reach your financial goals.’

Save a cash buffer

Hayley Millhouse, of financial advice platform OpenMoney, says a cash buffer is especially important should you lose your job or be put on a programme like the Government’s furlough scheme this year. 

‘As a rough guide, I would recommend a cash buffer of three months’ outgoings kept in accessible savings, but for many people this may not be realistic given current circumstances – save what you can,’ she says.

‘You may have already had a cash buffer, and have had to dip into it during the pandemic. Now is the time to replenish it. Draw up a new list of all income and outgoings and start afresh in 2021.’ 

Barclays’ Will Hobbs believes human innovation always comes through in a crisis

Human innovation will always win 

One of the few reassurances that can be taken from this crisis is the reliability of human innovation. 

Within the stock market, this is often conflated with technology, or related, stocks – and for good reason. 

High year to date returns for this cohort of stocks pay homage to the forced acceleration of digital innovation and adoption. 

Will says the lesson here for investors is that the bar for betting against human innovation should be extremely high. 

He adds: ‘You only need to look at the incredible race to locate and distribute a vaccine for evidence of this.’

Make looking after you, your priority

‘Having adequate pensions savings is essential as we’re living longer in retirement,’ says Emma-Lou.

‘And that’s especially the case for women who tend to live longer, on average, and yet so often let regular pension savings slide when they take a break to have a baby or find the onus is on them to care for an elderly relative.

‘Putting your hard-earned money to work and keeping it working hard is essential for your retirement success. 

‘If you already save the maximum you want to through your employer’s workplace pension scheme, or you’re self-employed, then in addition, you could consider saving into a Sipp.’

Make sure you aren’t missing out on any free employer contributions into your pension by doing this though. 

If you are self-employed and have a limited company, consider making contributions from your limited company. 

These will then be considered employer contributions and can usually be offset as a business expense which will reduce potential corporation tax liability. However, unlike personal contributions, employer contributions do not attract tax relief.  

Events shape markets, but expect the unexpected

Looking back at the outlooks from this time last year, 2020 was supposed to be a year where US elections, trade tensions and Brexit were the dominating market forces. 

While all of these themes did impact the markets, it was but a scratch compared to the impact of the pandemic. 

Will says: ‘The lesson here is that life, and investing, is unpredictable at the best of times and while we could rattle off a number of watch-outs for 2021, it’s often better to stick to your investing strategy and not to attempt to time the market.’

Keep it simple 

Managing a number of different Isas, savings pots and pensions can make keeping track of how your investments are doing and whether or not you’re on track with your goals more difficult. 

Emma-Lou says it might therefore be better to consolidate your savings and investments, where it’s appropriate.

She adds: ‘For instance, if you have a number of small pension pots from previous employers, it may be an idea to consolidate these into a Sipp. 

‘That way you can keep track of them more easily. You may also find that consolidating helps cut costs, plus you gain the ability to choose what your Sipp invests in.’ 

You might be better off rolling your old work pensions into your current employer’s scheme rather than using a Sipp. 

There can also be penalties for transferring a pension. Read more here about the pitfalls of ‘tidying up’ your pensions.

Talk about financial concerns 

Money can all too often be a taboo subject with family and friends, but talking about it openly and honestly and discussing concerns that may have arisen during the pandemic will help you gain a fresh financial perspective and support for the future.

Hayley adds: ‘A unified effort to boost your finances is often the best way forward. If and when the time comes, you may want to seek professional advice to help achieve your financial goals too.’ 

Which sectors could gain the most in 2021? 

Experts at online trading platform IG expect an almost exact reversal in performance from the sectors that have performed best during the pandemic as we head into 2021.

Evidence of this has already started to show with technology, consumer discretionary – meaning non-essential but desirable – and materials, which were the best performing sectors for the majority of the year, starting to slow down since November.

On the other hands, financials, real estate and energy, which have taken a massive hit over the past 12 months, are beginning to see positive returns.

Figures from the investment group show a strong negative correlation between stocks that performed well during lockdowns, and those that performed well on the news of a potential vaccine. 

For example, energy lost 35.4 per cent during lockdowns, but gained 12.4 per cent on the news of a vaccine.

Chris Beauchamp, IG’s chief market analyst, said: ‘Investors looking towards the post-pandemic world will need to ask themselves whether it makes more sense to play the rebound for the beaten down sectors like travel, or stick with the established winners like tech and pharma stocks that have shrugged off the slump from early March.

‘An end to lockdowns and a strong economic rebound might lift bank stocks, which have been notable underperformers, as consumers and companies borrow more. 

‘But the problem here will be the continued low interest rate world that has crimped bank profitability, and could continue to hold the sector back.’

This post first appeared on Dailymail.co.uk