OPINION: 2020 has been extraordinary for investing. Share prices always fluctuate but the speed of change this year has been remarkable.
We have seen three distinct stages so far.
January to mid-February was stage one for markets – largely positive. Shares were up and your KiwiSaver will likely have been too.
The US market (measured by the S&P500) rose 4.8 per cent over these first six weeks. The New Zealand market (measured by the NZX50) rose 4.2 per cent. This added to gains of 31 per cent and 29 per cent for the US and New Zealand markets in 2019.
But then the world hit a wall of worry, in fact, for a short period, it was more like panic. This was stage two. In the fastest bear (falling) market ever, the US market plummeted 24 per cent from mid-February to the end of March. The NZ market matched this with an 18 per cent fall. It was brutal and you will have seen losses in a growth or balanced KiwiSaver fund.
Then the market whipsawed back up in stage three. From April to the end of August the US market rose 35 per cent and the NZ market rose 22 per cent. Equity markets are broadly flat for the year so far.
What can we learn from this brutal sell-off and recovery? There are plenty of reminders for us about ourselves as investors, about how markets behave and about the global economy.
Firstly, in relation to ourselves as investors, it is critical to understand your personal tolerance for risk.
This is key to setting, and sticking with, your long-term plan. The worst thing you could have done in March this year was switch from a growth KiwiSaver fund to a conservative fund and lock in losses. Don’t be impulsive and act solely on emotion, instead make rational and well-thought-through decisions in line with your long-term plan.
Secondly, in relation to how markets behave, be aware that not all shares or sectors are equal. In the US, tech stocks are up 25 per cent this year, while oil and gas companies are down 50 per cent. Gold mining companies are up 28 per cent and banks are down 39 per cent. Meanwhile, companies that score highly on environmental, social and governance metrics (known as “ESG” factors) are proving to be more resilient in market downturns, with their share prices falling by less.
Some companies, countries and sectors will generate better returns than others. This means you’ll have a better chance of success if you seek out financial advice or at least rely on quality research.
Thirdly, in relation to the global economy, how governments and central banks react to a crisis has a huge impact on markets. There was swift action globally which involved vast amounts of borrowing, spending and money printing. The global economy and global trade were hit hard by the pandemic, but without government and central bank action the outcome would have been many times worse.
This has had a huge impact on how markets have responded by rebounding in our stage three from April to the end of August. 2020 has been extraordinary in terms of its three distinct stages – up a little (January to mid-February), down a lot (to the end of March) and back up again (April onwards).
What will the remainder of the year (stage four) deliver? Given this includes a US election and ongoing impacts from the pandemic, it is likely to be bumpy for markets. Successful investing requires you to be forward-looking but also taking with you lessons from the past. And when it comes to lessons, 2020 has already served up plenty.
John Berry is chief executive at Pathfinder Asset Management, and KiwiSaver provider CareSaver. His views in this article are general only and are not recommendations for any particular person in relation to any share or financial product.