To say that 2020 has been a volatile year would be an understatement. We have seen a global pandemic, large scale job losses and civil rights activism on a scale not seen since the 1960s. And it’s not even the summer holidays yet.
Investors are understandably concerned about the global economy and the prospects for investing. While some initial volatility is to be expected, it’s worth taking a long-term view. An investment plan does not run its course over a few months, or even a few years. During a lifetime of investing in a diverse range of assets, volatility is to be expected and absorbed.
Here are some reasons why 2020 could be a good time to start investing:
It’s a Buyer’s Market
In the chart above (from FE Trustnet), the green line represents the FTSE All Share (UK companies) and the yellow line represents the FTSE World index (global companies). As you can see, both indices experienced volatility throughout March and April. While the global market has more or less returned to pre-pandemic prices, the UK economy is still at a 3-year low point.
Many people would not have considered investing at the end of March, but had they done so, a 15% – 20% return to date would not be unrealistic. Of course, at the time, things were very uncertain and there was a strong feeling that the situation would worsen.
The market has bounced back slightly, but there is still potential for growth, as the lockdown is lifted and we move towards normality. By waiting until the situation settles down (as many investors are doing), it is very easy to miss out on the best days of the recovery.
Regular investing has an added advantage, as your funds can benefit from pound cost averaging. When the market rises, you profit from the investment gains. When the market falls, you have the advantage of low prices and can buy more shares for the same monthly contribution.
We cannot predict or time the market. A long-term plan relies on investing, and staying invested, through the peaks and troughs.
When investing, we expect a degree of volatility. A major world event, leading to a recession, can be assumed to occur roughly every ten years.
The chart below shows the FTSE All Share and FTSE World indices since the data began in 1994. We can see the dips caused by the tech crash in the early 2000s, the September 11th terrorist attacks, the 2008 Credit Crunch and financial crisis, and finally, the Coronavirus.
Each of these events caused catastrophic damage. But the economy is resilient and even with volatility, values have generally moved in an upward direction. Every recession in history has been followed by a recovery, which is usually longer than the recession and more than recoups any losses. There is no reason to believe that this won’t continue.
While most people are aware of the risks of investing, fewer are willing to consider the risks of not investing. Cash interest rates are at a historic low point, while inflation has averaged 2-3% over the last decade. This means that if your money doesn’t grow in value, it will be worth less in ten years. Your investments may not be able to provide you with the lifestyle you require if they don’t at least keep pace with inflation.
Inflation is caused by rising prices, which in turn is caused by higher costs of materials, transport, wages and other operational costs. It can also be caused by higher demand for goods and services. As restrictions ease, demand is likely to increase, at least in some sectors. Businesses will need to comply with social distancing and safety requirements, and may face extra logistical or operational costs. These costs will need to be passed on to customers.
Inflation is a certainty, and investing now provides the best chance of your money retaining its value.
With challenges come innovation, and we are currently in one of the most challenging periods in recent history. Companies and governments are seeking solutions that are not only effective, but also profitable. As we adjust to our new normal, some sectors are expected to grow significantly. For example:
- Sustainable investing has grown, both in terms of demand and investment return. Over $21.4 trillion is invested globally in sustainable assets.
- Healthcare and pharmaceuticals are another growth area. COVID-19 is only one factor. Increasing and ageing populations, technological advancements and the rise of chronic illnesses leads to greater innovation and demand.
- The UK government has recently announced plans to build and innovate within the economy, advancing infrastructure, green energy and creating a significant number of new jobs.
- The pandemic has demanded that we embrace technology more than ever. As remote working, online shopping and video calls have become part of everyday life, new products and services are being continually introduced.
2020 may be a pivotal point in history, with vast opportunities to invest in new innovations. While we cannot predict the companies that will do well, the point is that societal change is not a reason to delay or avoid investing, as there are plenty of growth opportunities.
As we cannot predict which companies, sectors and countries will thrive (and when), the best investment strategy invests across a range of assets. The goal is for the different investments to offset each other, so that when one falls, others rise.
Holding a diverse portfolio means not worrying about how world events impact a particular sector, or whether you are buying and selling at the right time.
Diversification is the simplest way to gain the benefit of market growth while reducing risk exposure in any one area.
The Best Time is Always Now
2020 is a great time to start investing. But so was 2019. The key point is that over the long-term, investments generally do grow in value, even if there is some early volatility. It is far better to invest now, whenever now happens to be, rather than waiting for some ideal future opportunity.
Please don’t hesitate to contact a member of the team if you would like to find out more about your investment options.