2020 was an excellent year to learn some of the timeless lessons in the world of trading and investments. Through all the uncertainty and panic, the investors and the market collectively told a very different story - and that is, of hope, and belief in long-term growth despite the challenges that humanity deals with along the way. In this article, we are talking specifically about investments - then let's dive in right away!
1. Emergency fund before investments
If you are planning to start your investment journey this year, then don't forget to have a sizable emergency fund in place to fall back on. While well-rounded, long-term investment decisions will not require you to fall back on them, you cannot start investing without a safety net to fall back on. You can also reconsider the definition of an emergency fund - should it be able to get you going for a few months without any external sources of income, or outlast a pandemic as long and stretched out as the one we saw in 2020?
Rethink your emergency fund, which will act as your primary safety net in case the market undergoes a temporary setback - either way, you should never think of your long-term investments as emergency funds. This will also give you the courage to ignore the temporary downfalls in market and business conditions, while building confidence in the power of long-term growth.
2. Diversification isn't a step - it's a process
Most investors make diversification a crisis-time response measure. This is because diversification can have a different meaning over long spans of time. Imagine a diversified portfolio from the 1960s - will the same sector-wise allocation successfully diversify a portfolio in today's world? What we are talking about here, is a shift of 60 years. But even in the middle term, micro-trends can rewire business models of industries, effectively calling for a reworked diversification strategy.
Good investors talk about asset allocation as a continuous process - diversification is one of the pillars of asset allocation for smart investing. In the coming year, investors should strive to continuously monitor their portfolios, and continuously rethink diversification in line with the market trends and new developments.
3. Don't overreact to volatility
Stock market crashes and crisis events in general - have taught us the same thing repeatedly. This is a big lesson in trust, panic and temperament in the world of investing. When the markets began going down during the early summers of 2020, some investors gave into their panic, and sold their assets to back out from current positions. However, when the markets began to catch up, not all investors were quick enough to react.
The result? By the end of May, when the markets began to recover, a number of blue chip stocks and mutual funds rallied to outperform their own historical records. This is yet another lesson in long-term investments: a balanced temperament which doesn't let your panic come to action is critical to getting the most out of stock markets. This new year, resolve to build this quality, and give your investment journeys a fresh start.
4. Hold cash for the right reasons
While divesting from long-term investments in reaction to a months-long trend is almost never a good idea, the importance of holding cash can never be understated. Good investors make it a practice to hold some cash for opportunistic reasons. We saw a few big IPOs in 2020, and a number of investors capitalized on these opportunities. Moreover, IPOs became a big topic of conversation on social media.
Some of the best IPOs saw investors exiting with handsome short-term gains. Moving forward, as more investors become aware about IPOs, many are making it a practice to hold cash for such opportunities. In fact, the pandemic also demonstrated how short term trends can lead to some significant opportunities in the short and medium term. Hold cash in your trading accounts for the right reasons - and not as a result of divesting from your long-term investments in panic.
5. 2020 trends that will outlast the year
There were a number of trend-shifts in 2020 - in the ays of working, saving, spending and borrowing money. Top investment advisors are speculating that the impact of the pandemic on money habits will unfold over the next 3-4 years. As the pandemic subjected a handful of people to harsh economic realities, masses are busy expanding their emergency funds and saving more in general. Markets are expected to see an unleash in spending over the next few years, although the release of this liquidity into the system is highly contingent on the time frame of pandemic recovery.
There are many such trends that will outlast 2020, and some will leave a lasting impact beyond the pandemic too. Keep an eye on what the thought leaders have to say, and how industries and perceptions are undergoing reformations over time. After all, we have set foot into a new decade with a pandemic of global scale, and are still here beyond all the challenges that such a massive event brought to people everywhere. To keep your portfolio successful in this fast-moving world, staying tuned to critical developments has become a prerequisite.
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