One day, we will be through all this.
Just as with the financial crisis and ensuing recession of 2008–2009, better times will eventually come. The mood may be downbeat now, but the clouds will pass.
The question for investors: what lessons will they take away from this strange period, and how will those lessons shape their future investment decisions?
Learning from experience
Not everyone will take the time and trouble to reflect on the journey we’ve all been on over the past few months – a journey that has yet to reach its conclusion.
And not everyone who does so will formulate any changes to their investment approach as a result, or get around to putting any of those changes into practice.
But for those who do, I predict that the effort will be worthwhile. For there have been profitable lessons aplenty, for those who care to look.
Here are three that strike me, for instance.
Income investors need larger reserves
For income investors, the end of March and the beginning of April were uncomfortable times. In the dash to conserve cash and shore up balance sheets, huge numbers of companies cut their dividends or cancelled them altogether – even companies that on the face of it had little need to.
Thinking that they’d never experience anything worse than 2008–2009 to contend with – or that something worse could never come along so soon after 2008–2009’s dividend drought – many investors went into lockdown with inadequate income reserves.
I’ve certainly re-thought my own approach to an income reserve, deciding to now hold a full year’s income in my various brokerage accounts as an income buffer.
It’s probably excessive – but better safe than sorry.
So-called ‘defensive’ investments often weren’t
One of the biggest surprises of the last few months is how many supposedly defensive consumer-focused stocks turned out to be not at all defensive in the face of lockdown.
Put another way, many stocks that more or less shrugged off bad times in 2008–2009 stumbled badly in 2020.
Shuttered factories, shuttered retail outlets, shuttered pubs and restaurants, shuttered airlines, shuttered leisure facilities: lockdown affected huge swathes of the economy.
So going forward, many investors will want to re-define exactly what is meant by ‘defensive’ investments – especially in the context of pandemic-induced lockdown – and make sure that they increase their exposure to them.
Looking at my own portfolio, sectors such as food production, food retail, logistics infrastructure, and specialist REITs have been the investments to hold.
Ironically, pre-pandemic, I’ve seen investors turn their noses up at all of these – but not any longer, I’m guessing.
For safety, stretch your investment horizons
As I’ve remarked before, the last few months haven’t been kind to those investors with a bias towards the FTSE 100. Home country bias is never a good idea, however comforting, and it seems clear that many other countries – and other economies – have fared better than the UK during the Covid-19 pandemic.
Large low-cost investment trusts make investing overseas very easy, and a few weeks ago I pointed to some Asia-focused trusts that I hold in my own portfolio. Just like the Footsie, these were hit during the dark days of March – what wasn’t? – but have since bounced back, and generally bounced back a little further than the Footsie.
Exposure to Europe and North America is also sensible, and again, investment trusts make it easy. And large multinationals — as well as investment trusts such as Scottish Mortgage – are a way to play the global economy. Unilever, Reckitt Benckiser, GlaxoSmithKline, HSBC, the oil and mining giants: each of them has a broad geographic footprint.
So post-pandemic, astute investors will doubtless want to re-evaluate their asset allocation: going overseas has never been easier.
Action not thoughts
Different investors may draw different lessons, of course: these are the lessons that I see from my own pandemic experience, looking at my own portfolio.
My guess, though, is that they are broadly enough applicable to make them worth sharing more widely.
As ever with these things, though, it’s not the sharing that makes a difference to portfolio performance – it’s the putting into practice that matters.
My view: the time to start thinking about pandemic-proofing your portfolio is now, not when normal life resumes.
Malcolm holds shares in Scottish Mortgage, Unilever, Reckitt Benckiser, GlaxoSmithKline, and HSBC. The Motley Fool UK has recommended GlaxoSmithKline, HSBC, and Unilever.