A year to forget, but lessons to remember

“Write about 2020,” they said. “You know: the big investment stories of the year.”
 
I know, I know.

There’s been only one big investing story in 2020, and you certainly don’t need me to remind you about it.
 
Out of the blue, the Covid-19 coronavirus has had a devastating impact – on people’s lives, on the economy, and on all of our investment portfolios.

The crash that no one forecast

London’s Footsie began 2020 above 7,600 – closing at 7,604 on 2nd January, to be precise. The drip-drip-drip of bad news from Wuhan saw it gradually deflate during January and February.
 
And then came the last week in February. On 21st February, the Footsie closed at 7,403. On 28th February, it closed at 6,581 – a fall of some 11%. Worse was to come: by 10th March, the index had fallen below 6,000, closing at 5,960.
 
Just two weeks later, on 23rd March, a UK-wide lockdown was announced. By then, the Footsie had reached 4,994.
 
But although we didn’t then know it, that was the market’s nadir.

What have we learned?

Many things.
 
We have learned that the global economy is more fragile than we feared.
 
We have learned that national lockdowns aren’t something that take place somewhere else to someone else, but can happen here.

We have learned that in a pandemic, resilient-looking industries can suddenly be largely closed down, by government dictat.
 
We have learned that it is possible for the Bank of England to set Bank Rate as low as 0.1% – one-fiftieth of what it was just before the financial crash of 2008.
 
We have learned that when faced with the unknowable, companies’ boards of directors can unilaterally decide not to pay dividends, even if those companies are trading profitably.
 
And we have learned that, in the case of financial institutions such as banks, governments can simply ban dividends.

Yes, but what else have we learned?

That depends. Because here, it’s not about learning new things, or learning quite how extensive is the envelope of possibilities. It’s more about learning that yes, there is indeed a point to some of the investing advice that we read.
 
We have learned that even well-off white-collar employees can suddenly find themselves furloughed or simply unemployed, leaving them with bills to pay and scant income with which to do so. Having savings matters.
 
We have learned that diversification is important. Diversification across companies, industries, geographies, and asset classes.

We have learned that if you’re brave enough to be greedy when others are fearful, then it’s possible to lock-in juicy returns and attractive income streams. Ask those who bought in when the Footsie sank below 5,000 on 23 March – 30% or so below its level in early December.
 
We have learned that being brave enough to be greedy when others are fearful is surprisingly difficult, even for those of us who have weathered past downturns with aplomb.
 
And we have learned the value of diverse income streams, and secure income streams. Ask those who live on their dividends, with perhaps a couple of buy-to-let properties on the side – properties let to furloughed tenants who can’t pay the rent.

What to do?

Household balance sheets are battered. Investor confidence is fragile, and higher taxes beckon.
 
Yet for the brave, there are still bargains aplenty: bombed-out businesses in bombed-out sectors, as well as quality blue-chips trading on well-depressed multiples. Personally, I’m buying, and have been doing so since the late summer.

As I write these words, in the last couple of days before Christmas, a Brexit free-trade deal still appears elusive, although hopes are rising. Thanks to the new coronavirus variant, freight flows have been disrupted, and travel bans are in force.
 
2021 is going to be, well, interesting.
 
And so, best wishes to you and yours for what remains of 2020. Keep safe, keep investing, and keep the lessons of 2020 in mind.