Past year somewhat of a roller-coaster ride for investors

In a quite extraordinary year for investors, by the beginning of September equity markets were slightly ahead of where they had been 12 months previously.

A casual, well very casual, observer might be forgiven for thinking that it was just another average year on the markets with nothing remarkable to note.

But that, of course, would be far from the reality.

"It's been a three-chapter year," says Kevin Quinn, chief investment strategist with Bank of Ireland.

Many investors appear to have kept cool heads despite the volatility and uncertainty

“From September to February we saw a 10 per cent gain in global equity markets. That came to an abrupt end when the crisis hit home on March 23rd. The market gave up one third of its value very quickly.

“The third chapter saw massive monetary and fiscal support from Government and central bank which saw a 40 per cent increase to September. It’s been quite a roller-coaster. Year on year there was a 3.1 per cent gain to mid-September. That might seem an ordinary enough year, but it had three distinct phases with 2020 being dominated by the Covid-19 crisis.”

For Brewin Dolphin, investment strategist Ian Quigley, the past year has served as a reminder of the importance of first investment principles.

“We’ve seen pretty extraordinary volatility,” he says. “There was a steep decline followed by a dramatic recovery. That re-emphasised the need for investors to have a good plan and a diversified portfolio.”

He points to long-term statistics which show that investors who managed to stay invested during periods of volatility did better than those who felt compelled to try to time the market.

“The key is to have a portfolio that allows the investor to withstand the shocks better,” he adds.

But many investors appear to have kept cool heads despite the volatility and uncertainty, according to Pat Cooney, group head of private clients with Davy.

“It is different this time, people didn’t panic,” he says. “Overall, the industry has changed enormously over the years from stockbroking to investment management to goals-based financial management. We dropped the word stockbroker from our name to reflect that wider offering. The good thing is that it gives clients better outcomes and left them much better prepared for the Covid world.”

Two crises

The key has been to have a goals-based financial plan.

Financial markets have always been volatile and uncertain in the short term

“The plan helped to keep people calm or calmer at any rate,” Cooney explains. “We also worked hard on client engagement with daily communications and regular webinars to keep them up to date on developments. There will always be volatility. If look back over the last 10 years to SARS, MERS, Isis, the Korean nuclear issue, Iran, Brexit, trade wars and so on, we’ve probably had two crises a year.”

Pramit Ghose, global strategist with Cantor Fitzgerald, concurs.

“Financial markets have always been volatile and uncertain in the short term. I started my investment career in the mid-1980s, and have managed investment portfolios successfully through the 1987 crash, two Gulf War crises in 1990/1991 and 2003, Sterling/Irish currency crises in 1992/1993, Asian economies collapsing in 1997, the LTCM hedge fund collapse in 1998, the tech crash of 2000-2002 including 9/11, the great financial crash of 2007 to 2009, the euro existential crisis from 2011 to 2012, the China slowdown in 2015, and so on.

“Despite all of these crises and crashes, all of which were temporary, equity markets always recovered and went on to to higher levels.”

He remains sanguine about the period ahead.

“Now we have the pandemic, Brexit and the geopolitical crisis, so, of course we are going to have uncertainty and market volatility for the remainder of 2020 and into 2021 but that should not put off investors. The key for investors is to take the longer-term view, try to avoid overpriced assets, and err on the side of caution. We spend a lot of time with our clients to develop a longer-term outcomes-driven investment plan, with plenty of diversification and conservatism.”

Dealing with that volatility is the key challenge facing many personal investors at the moment.

“We’ve been through an exceptionally turbulent year,” says Quinn. “It’s important for investors to ensure their portfolios are diversified across assets, sectors and geographies and to remember the first principles of long-term investment. Investors who sold in February or March had a very, very poor outcome.”

Quigley urges investors seeking inflation-beating returns in the current ultra-low interest rate environment to be very careful in their choices.

Negative rates

“Some banks in Ireland are starting to charge negative rates for deposits”, he says. “That will change behaviour as people don’t like to pay money just to have it in an account. It is compelling people to think about protecting their capital. They will see investments out there that offer cash alternatives, but they need to be careful and ask themselves if they understand what they are investing in. It is definitely an area investors should take advice about.”

Ghose cautions those putting their faith in technology stocks.

“In our view, some of the recently high-flying technology stocks, while truly excellent companies and structurally advantaged to benefit from changing lifestyles and working habits as a result of the pandemic, look to have priced in a lot of their future growth, and investors should avoid overexposure to them at the moment. Neither does it make sense to us to invest significantly in negative-yielding bonds. Why buy assets that are guaranteed to lose you money if held to maturity?”

But there are still opportunities out there.

“We can still find a reasonable number of financially-strong companies with strong cashflows and attractive dividend yields that can, in our view, continue to increase these dividends into the future despite the uncertainties ahead,” he says.

“A diversified portfolio or fund of these companies seems to us to be a good income-generating yet relatively conservative core ‘stocking filler’ holding for a longer-term investment portfolio, subject to risk profile.”

Cooney comes back to the need for a plan.

“There is always talk of turbulence, it’s how you navigate it that will set you apart,” he says. “The key is to get good advice and to have a plan. I can’t overemphasise the importance of goals-based planning. Life’s better with a plan. The plan may have to change over time but it’s important to put in the time and effort and have a plan to begin with.”