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What investors learned (again) in 2020

The year 2020 will be remembered for all the right and wrong reasons. The deaths from Covid-19 and the images of deserted cities highlights the dark aspect. On the other hand, staying home and working less, reconnecting with family, living life at a slower pace, all have yielded a physical and mental rejuvenation to a workaholic and fast-paced society. For the first time in decades the skies went blue again in India and the waters of Venice became crystal. 

Stock markets were not absent from the drama. The roller coaster ride of March 2020 sparked the shortest bear market in U.S. history. For some investors it presented a golden opportunity for bargain hunting, but for the faint-hearted investors it was a nightmare come true.   

Strategy over emotion

In 2019, stocks went on an upward frenzy and markets posted their best year since the financial crisis of 2009. Early into 2020, investors were confident. In March it all came crashing down. In a four-day span, the Dow Industrial Average lost 26% of its value. 

It was during those days that nervous clients were seeking guidance as well as support.  It is not an easy task to reassure someone that has seen their pension savings lose 20% of its value in a matter of days. However, the punchline was the same to everyone; stick to your guns, nothing has changed. 

A pension portfolio follows a long-term approach and short-term market hiccups must not derail the master plan. It is understandable that the fear of loss can be overwhelming, but conviction in a sound strategy is what must prevail. Nervous, yet composed, most stood firm and rode the brief but rough storm. Their patience was rewarded. The year finished with gains, but most importantly, they learned a priceless lesson in investing; strategy over emotion. Do not act due to panic.

Timing the market

Even the most experienced and seasoned professionals do not claim that they can time the market. The well-known Warren Buffet cliché “It's about time in the market, not timing the market” is as effective as it is simple. Some of the clients that called in March asked if they should sell and buy at the bottom. Unless one has a crystal ball, it is impossible to know when the bottom has been reached. Those who were not brave enough to stay the course, sold and waited for the bottom to get back in again. Well, the bottom came, the bottom left and the losses of March 2020 were erased. Those who panicked and liquidated are still sitting on cash, and will not reposition themselves because they consider prices “too high”. “Too high” does not exist if you follow a long-term strategy. 

History is on your side

For a long-term investment strategy to be successful, two ingredients are paramount: Well-Diversified Portfolio and Time Horizon. Once the correct Funds are selected, the investor will just need to be patient and disregard short-term fluctuations, irrespectively of how nerve-breaking these may be.

In a recent study conducted internally at Ancoria Insurance, historical market data were used to illustrate how investment horizon can diminish the possibility of market losses. The study triumphantly proved how time and performance are interrelated. Between 1987 and 2018, if one invested in either the MSCI World Index, S&P 500 Index or the STOXX Europe 600 Index with a 20-year horizon, the probability of a negative return was zero. As the horizon decreased, the probability of a negative return increased.

Investors often have the urge to fiddle with their investments, especially during volatility. They are overcome by an emotion of helplessness, or even sometimes despair, and feel they ought to act. However, engaging in frequent trades to time the market will not yield the intended results.  If it works out sometimes, it is purely a matter of luck. In the long term this strategy will not work. The best thing to do is nothing. Stay put, have faith in your strategy and let time work for you. 

It is as simple as that.

The project was submitted under the Digital Transformation for Business Program and is co-funded by the European Regional Development Fund and the Republic of Cyprus.