Who would have thought we would kick off 2021 in almost the same manner as 2020? Even though we were all hopeful that 2021 would start on better footing, numerous countries are still in lockdown, South Africa is fighting against its second surge of Covid-19 infections and economies worldwide continue to struggle. For humanity, we gladly waved goodbye to 2020, but for markets, we have seen a period of surprising benefit and near-record highs.
Global and local equities, bonds, gold, commodities, and even bitcoin have all moved forward and delivered positive performance despite struggling economies, widespread job losses and the biggest contraction in almost 90 years.
The final quarter of 2020 was strong by historical standards. Investor sentiment had been lifted by the news of the rollout of a vaccine worldwide alongside the perception of greater political stability.
In an article I wrote at the end of 2020, I used the analogy of a rollercoaster ride to describe the year – not only from a market perspective but especially from an emotional perspective. 2020 marked one of the most severe sell-offs in market history with three of the worst trading days recorded (historically) in March alone. With that being said, we also experienced the shortest bear market recorded (spanning over just 33 days) with most markets now sitting at all-time highs.
The one thing that 2020 highlighted again was our behavioural biases, exposing our good and bad traits when it comes to investing.
Let’s look at some of the lessons learnt in 2020 that will be worth remembering in 2021 and beyond.
- Markets cannot be timed
Let’s say, hypothetically, you had anticipated that there was going to be a global pandemic, which you know would scare investors across the globe, resulting in sharp declines in the global stock markets, and you decided to withdraw your investment(s). Even with this knowledge, it would have been extremely difficult to predict the timing and strength of the rebound in the market. In this case, the severe downturn has (in many instances) corrected itself within a mere six months. Ultimately, you may very well still be sitting on the sidelines waiting for a better entry point to get back in.
It is critically important to remain invested, through good and bad times. Often the worst days in the market are followed by the best days. Unfortunately, you need to be invested through both the good and the bad to reap the benefits of gaining long-term market returns, which translate into wealth creation over time.
The graph below illustrates how missing a couple of good days in the market can severely impact your portfolio return over time.
Risk of missing the best days in the market 1995 – 2020.