Five investment lessons learned from lockdown

What has the pandemic and the resulting market downturn taught us about investing?

 

The recent coronavirus lockdown has allowed some of us to learn many new skills, from embroidery to making sourdough or banana bread. But there are even more beneficial things we can all learn from the way the stock market and other investable assets have behaved in recent months.

Now that lockdown is easing and the market has stabilised somewhat, here are some of the most important investment lessons we can take away from the COVID-19 crisis. Understanding these lessons can improve our wealth for the better and help us to reach the goals we have set ourselves.

 

1. Diversification can provide resilience

It can be hard to know how to spread your money across different assets, but recent events have shown how diversifying your portfolio can protect your wealth.

For example, a mixture of shares and corporate or government bonds can prevent you from being overly exposed to the performance of one particular asset. When the equity markets slumped in February, those with bonds in their portfolio saw less of a fall in the value of their investments.

Everyone’s perfect mix of assets is different. A financial adviser can help you create a diversified portfolio that’s right for you.

 

2. A UK bias isn’t always best

Many of us tend to have what is called ‘home bias’ when it comes to investing. That means that we are more likely to have UK funds and stocks in our portfolios than those from other nations.

In some ways this makes sense – after all, these investments aren’t at the mercy of currency fluctuations against the pound. However, coronavirus has highlighted that this can come with some risks.

The UK’s FTSE 100 has lagged behind other stock markets in terms of recovering from the slump earlier this year. There are several reasons for this, including continued Brexit uncertainty and the large number of oil and industrial based stocks in the FTSE.  This highlights that it can be wise to look to foreign investments to balance this out.

 

3. Dividends aren’t always safe

With interest rates at record lows, everyone is looking for income from dividend-paying shares. But the recent report from Link shows that dividends paid out by UK companies were down 57 per cent on the previous year in the second quarter. [1]

These are unprecedented times, but the speed at which payments were slashed illustrates the need to understand the cash reserves, dividend policies and financial management of superficially attractive dividend paying stocks - something that expert financial advisers can help with.

 

4. Regular investing smooths returns

Those people who save monthly into an ISA or pension have done well during the coronavirus crisis, without the stress of having to time the market. Instead, when the market is down, their money has bought more investment units, ensuring that the returns they receive are smoother.

 

5. Everyone needs a flexible retirement plan

Crashes like the one that occurred earlier this year can put fixed-time plans like a retirement date into jeopardy, with the potential for your whole investment pot to lose value at a crucial moment in your life. That’s why involving experts in your retirement planning is so important – they can ensure that you use your assets in the most efficient way possible, rather than crystallising losses at a moment when the market is down.

 

To learn more and create a robust financial plan that is tailored to you, speak to one of our expert financial advisers.

 

This article is for information purposes only and is not intended to recommend suitable investment strategies. You should seek professional financial advice before taking any action. Please note the value of investments and the income derived from them may go down as well as up.  



 

1. https://www.linkassetservices.com/our-thinking/uk-dividend-monitor-q2-2020