2020 was a year that none of us will forget. At the start of the year we expected market movements around the US elections and the unknown Brexit outcome, but what we did not expect was a global pandemic. It is a reminder that no one can predict the future for markets and that a robust, repeatable investment process should be the preferred choice for investors over the longer term.
New year is usually a time that we make resolutions to make changes to our lives. Often it ends in procrastination. It is likely that 2021 will hold more short-term market noise and this is when new year investment resolutions often go out of the window. So, at the start of 2021 it seems timely to re-affirm the Progeny investment philosophy. These are the five key principles that constitute our investment approach:
- Get the asset mix right
- Diversify broadly
- Manage financial costs
- Control emotions
- Rebalance the portfolio
This may seem like common sense, but it is amazing how many investors seem to have actually forgotten these principles in 2020. After the 19th February, which was the point the Coronavirus started to take a foothold in the western world, we saw the quickest market fall in history, with the FTSE 100 down 34% in four weeks (previously, the average time for the market to fall by this much was nine months!). This was mirrored by the S&P 500 also.
March 23rd was the lowest point, with the FTSE 100 closing at 4898 – the first day of the UK’s national lockdown. Leaving emotions out of the investment process was key here as by the 31st December, the UK’s leading index recovered to 6460, which represented a smaller, 14.3% decline over the year.
We believe that keeping a diverse portfolio is crucial and certainly to avoid betting on one market. For example, the UK market may look cheaper than other markets today but if the S&P 500 is reweighted to match the same sector exposure as the UK, the valuation premium disappears.
Key global markets like the US performed much better last year, making positive returns given they have the highest weighting of technology stocks, with the S&P hitting record highs again in August, just six months after the February crash. The dash for tech in lockdown was the main driver here.
We also believe that stock market volatility will remain in the year ahead so ensuring clients have the correct mix of assets to match their attitude to risk will be as important as ever. This means making sure there is correct proportion of growth assets (equities) to defensive assets (government and corporate bonds).
In summary, the positive news on a COVID vaccine, a new US President-elect and monetary stimulus all helped markets recover in 2020. Looking ahead, more than ever we expect more emphasis on responsible investment and the integration of ESG factors. If any one thing is certain in investment markets it is that investors need to ensure their portfolios have the best chance of weathering the next extreme event when it arrives. Hopefully that won’t be in 2021…