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3 lessons from 2020

18 December 2020

9 minute read

As usual for this time of year, we take the opportunity to reflect back on some of the lessons learnt. The team pick their top three (of the many lessons always being taught by markets!). From a reminder of the high threshold to bet against humankind’s ingenuity to the dangers of misusing historical context, we discuss the ways in which we think this year could make all of us better investors.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • Lesson 1 – bear markets are emotional.
  • Lesson 2 – past is prologue?
  • Lesson 3 – technology is the saviour.

As per tradition, we use this final publication of the year to reflect on the lessons of the latest trip around the Sun. As always, there was much to absorb(!), but here are three messages from 2020 that the team thought particularly important.

Lesson 1 – bear markets are emotional

As many investors have found over the years, it is all very well to talk about what you will do when the price of an asset or group of assets falls sharply. However, it is a very different thing to carry out your carefully laid plans when a crisis hits. This lesson is about the idea of trying to keep cool and buy shares/high yield (economically-sensitive assets) when markets are crashing. It tends to be hard, which is why the lessons (for us and for all) is about process, behavioural guidance etc.

The anticipatory nature of capital markets’ assets can mean that the worst declines happen before the real economic damage has shown up in the data. Shocking and disorienting headlines blare from TVs and other screens. Experts of all flavours are wheeled out to tell you how this is just the beginning, an aperitif for the real market bloodbath that lies just ahead. To commit your hard-earned savings to a stock market, such as the FTSE 100, that has just fallen by a third in less than a month in this context is understandably challenging.

Part of the responsibility of our in-house asset allocation team is for a shorter term portfolio – the Tactical Asset Allocation (TAA)1. This TAA is tasked with scooping up extra basis points of performance annually from a variety of sources. As we’ve pointed out, this is not something that can be done part-time. It is an often insanely competitive pursuit played by thousands of investors worldwide. Opportunities to add performance to the core mix of assets embodied in our Strategic Asset Allocation (SAA)2 in this manner appear and disappear quickly.

One of the key successes of the team this year was the addition of significant market exposure (here represented by developed world equities and high yield bonds) in and around the bottom of the market in March. Going into the crises, we were happily more or less neutral risk (of course, not through foresight of a global pandemic!). The team then added share exposure at the end of February and at the end of March. This decision was motivated by several important factors.

First and perhaps most importantly, the team had spent many months prior to this crisis designing and back-testing an investor sentiment gauge. At extremes, this gauge gives a strong signal to do the opposite – buy when others are fearful, sell when they are jubilant. Importantly, this indicator allowed the team to see the historic results of practicing this often preached, but less frequently practiced, maxim. The fact that by the end of March this sentiment indicator had descended to depths never registered before gave the team some confidence in adding to risk at that moment.

This was also one of many moments for us to be grateful for our first mover advantage with regards to incorporating behavioural science into our investment process. From the existence of check lists to the constant presence of behavioural experts to check our worst impulses, this is an evidence-based investment process policed by the latest in behavioural insights.

These factors, alongside their considerable experience and diversity of thought, allowed the team to remain calm when all around were struggling to do so and add material performance to portfolios and funds.

Lesson 2 – past is prologue?

We often use the past to orient ourselves in the ever noisy present. However, this is a tool that needs to be used very carefully. Specious historical context is more dangerous than none at all when it comes to making sound investing decisions. Those who had relied too mechanically on their recession and bear market playbook of the past would have found themselves stranded on a number of occasions in 2020. The market descent was faster than most, but the recovery has been equally breath-taking. The reality is that there are few, if any, analogues to the experience of this year. The response from the world’s policy makers is the differentiating factor, both in its speed and muscularity.

This should also teach us wariness when it comes to uses of history to predict what comes next. One interesting study from the IMF3 has looked at every major pandemic since the Black Death and assessed the aftermath to whatever extent data allows. The results are staggering. Growth and inflation suffer materially for decades after such pandemics. This study comes at a time when yet more low growth and inflation ahead is hardly a stretch to believe for many market participants.

Even so, the why is important here. The economic aftermath to past pandemics owes much to an understandable change in spending and saving habits from consumers. Growth and inflation has, in part, slumped because scarred survivors have felt the need to save more of their post-tax income. However, the authors themselves point out that there may be important demographic differences to disentangle. The fact that this pandemic has disproportionately affected the elderly, a cohort with an already high savings ratio, may increase our ability to suggest that this time is indeed different. Alongside this, the policy response and the pace of the vaccine development are likely two further important distinguishing factors.

There are others who are confidently painting an entirely different vision of the future, citing a bacchanalian splurge in the immediate aftermath of the Black Death as their evidence. The message from us, as usual, is to beware of confident predictions, especially those backed by often lazy historical analogy. The future remains unknowable from our current vantage point, no matter how much we squint. We need to invest accordingly.

Lesson 3 – technology is the saviour

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. Year to date returns for this cohort of stocks pay homage to the forced acceleration of digital innovation and adoption. From the spike in percentage of online retail sales to increased adoption of technology due to working from home, there are few aspects of people’s lives that haven’t changed as a result of the pandemic. Satya Nadella, Microsoft CEO, aptly summed this up earlier in the year when he said “we’ve seen two years’ worth of digital transformation in two months.”

The multiple vaccines recently announced (with mostly higher-than-expected efficacy rates) are also another excellent example of human ingenuity. A process which typically takes years was achieved in mere months, thanks to an unprecedented international effort of the scientific community. The start of a vaccination programme in the UK represents a huge milestone in getting back to some kind of normality, and has undoubtedly brightened the medium-term outlook for the global economy.

The lesson here for investors is that the bar for betting against human innovation should be extremely high. Of course, we should be mindful that the current price to access these forces of innovation – and the resultant cash-flows – is sufficiently attractive. Based on our latest assessment of prospective returns, we still see merit in investors getting invested (and staying invested) in a multi-asset fund.

It’s also worth remembering that the beneficiaries of technological advances aren’t confined to their creators4. This is why we also advocate investors cast their investment net widely – well beyond the superstars of today. A careful study of history shows that many of the winners over the next decade are unlikely to be the winners of the past. 

Conclusion

These are obviously not the only lessons to be learnt this year. Markets are always teaching us humility for one thing and there was certainly plenty of that lesson to go around this year. However, these three are likely to be helpful for us all to remember as we go into 2021.

Where to invest?

We believe that the best way to achieve your long-term investment goals is to have a diversified portfolio. To help you we’ve created our Funds List – it’s made up of funds we like from the sectors we believe are key to building a diversified portfolio. Within each sector, there’s a mix of investment focus and investment approaches to choose from. So why not take a look at our selection?

To diversify your investment, you may like to consider our own Barclays Ready-made Investments (RMI). The RMI are just one example of a range of diversified funds which allow you to select the level of risk you are most comfortable with. These multi-asset funds invest in passive funds across a range of asset classes and regions, offering a globally diversified one-stop solution for investors. Ready-made Investments are not the only funds that we offer and they won’t be appropriate for everyone.

Whichever option you choose, you must accept that all investments can still fall in value as well as rise and you might get back less than you invest.

We don’t offer personal investment advice so if you’re unsure you should seek that independently.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

Plan & Invest is a new service which creates and manages a personalised Investment Plan just for you. Whether your long-term goal is your child’s university education, retirement or just building a nest egg, all you have to do is tell us a bit about yourself and then, if your application is successful and you’re ready to invest, let our experts select and manage your investments (minimum investment is £5000).

Read the Assessment of Value report for funds run by Barclays. [PDF, 683KB]

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