2020 has been a year that has seen many people take a hit to their wealth.
Some have had to dip into savings in order to survive. And with Bank Rate being reduced to just 0.1%, the real inflation-adjusted return on most savings accounts is negative.
True, people who have managed to stay in work may well have seen a rise in their disposable incomes through a lack of opportunities to spend during lockdown.
But the value of their investments will almost certainly have fallen: back in March, you remember, the FTSE 100 sank to 4,994 – a shocking slide from the 7,500 or so it stood at during January and much of February.
In short, it’s been a year that has reminded me of the words of America’s former Secretary of Defense Donald Rumsfeld.
“There are known knowns: things we know that we know. And there are known unknowns: things that we know we don’t know. But there are also unknown unknowns: things we do not know we don’t know.”
And I think that we can all safely say that we didn’t know that a global pandemic was on the cards for 2020, or quite how devastating and dangerous such a pandemic could be.
Or that it could wreak such havoc on our investments. Not surprisingly, with their investments in meltdown, a lot of worried retail investors sold up, unable to stomach what they were seeing.
We didn’t expect these, either
Rumsfeld first served as Secretary of Defense under president Gerald Ford in the mid-1970s. He served again under George W. Bush from 2001 to 2006.
Granted, the mid-1970s was a long time ago. But 2001–2006 wasn’t that long ago. Many of you, if you are investing today, would probably have been investing back then, albeit perhaps on a slightly smaller scale.
So think for a moment about all things we know now, that we didn’t know back then – and that, what’s more, we also didn’t know that we didn’t know these things, or that they were possibilities that could blow our investment strategies off course.
Brexit, for instance. Donald Trump and his trade wars. The Great Financial Crash of 2007–2008 – which promptly heralded the worst recession since the 1930s. The current Covid-19 pandemic. And of course, the current recession, which makes that earlier 2007–2008 recession look like a breeze.
What are the lessons to come from this? I can think of several.
First, when such things happen, don’t panic. For ordinary investors, I believe that it’s often better to stay invested rather than selling up and trying to time the market. Think long term, not short term.
Second, diversify. Across asset classes, geographies, and industries. Spread your risks; avoid ‘home country bias’.
Third, relying on cash to generate an income is a mug’s game – something that was last probably viable as a strategy during Rumsfeld’s second term in office. Ever since, interest rates have generally moved in only one direction: downwards. For serious wealth accumulation, the markets are just about the only game in town.
Fourth, recognise that it’s no bad thing to at least hold some cash, or investments that you can quickly turn into cash. While these periods of turbulence are uncomfortable, they do throw up bargains. So be in a position to take advantage of those bargains.
And fifth, quality matters. In every case, it’s been large, well-managed, defensively positioned businesses with decent balance sheets that have tended to suffer the least pain. Companies such as Unilever. Or GlaxoSmithKline. Or Diageo. Or AstraZeneca. And so on, and so on.
This is what investing is like
But the real lesson is this: wealth accumulation involves living with volatility and uncertainty. No matter how well you plan, or how sound your strategy.
So accept this volatility as a fact of life. Where you can, take steps to minimise its effects through diversification, and by choosing high-quality investments. And where you can, position yourself to profit from bargains.
But there’s little point bewailing your losses, or being deterred from investing because of them.
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Malcolm owns shares in Unilever, GlaxoSmithKline, and AstraZeneca. The Motley Fool UK has recommended Diageo, Unilever and GlaxoSmithKline.