When the coronavirus pandemic hit financial markets in March 2020, almost 40 per cent was wiped off the value of shares in less than a month. Understandably, many investors hit the panic button and switched to cash or withdrew savings from superannuation. 

With the benefit of hindsight, some people may be regretting acting in haste.

As it happened, shares rebounded faster than anyone dared predict. Australian shares rose 28 per cent in the year to June 2021 while global shares rose 37 per cent.

While every financial crisis is different, some investment rules are timeless. So, what are the lessons of the last 18 months?

Lesson #1 Focus on the signal, not the noise

In military communications you will come across the term –separating the signal from the noise. The signal is the meaningful information that you’re trying to detect. The noise is the random, unwanted variation or fluctuation that interferes with the signal. 

When markets suffer a major fall as they did last year, the ‘noise’ can be deafening. From headlines screaming bloodbath, to friends comparing the fall in their super account balance and their dashed retirement hopes. 

Yet as we have seen, markets can swing quickly and often in direct opposition to the “mood of the day”. That’s because on any given day markets don’t just reflect economic fundamentals but the collective mood swings of all the buyers and sellers. In the long run though, the underlying value of investments generally outweighs short-term price fluctuations. One of the key lessons of the past 18 months is that ignoring the noisy doomsayers and focussing on investing fundamentals is better for your wealth. 

Lesson #2 Diversify, be liquid, be flexible

Another lesson is the importance of diversification and liquidity. By spreading your money across and within asset classes you can minimise the risk of one bad investment, plus with investment liquidity, you can flexibly allocate capital to protect your portfolio and take advantage of opportunities as they present themselves. 

For example, in the year to June 2020, Australian shares and listed property fell sharply, but positive returns from bonds and cash acted as a buffer reducing the average capital loss of balanced funds to 0.5%. 

The following 12 months to June 2021 shares and property bounced back strongly, taking the average returns of balanced funds to 18 per cent.  

Investors who switched or remained in cash at the depths of the market despair in March last year would have gone backwards after fees and tax. 

Lesson #3 Stay the course and catch the major trends

The Holy Grail of investing is to buy at the bottom of the market and sell when it peaks. If only it were that easy. Even the most experienced fund managers acknowledge that investors with a balanced portfolio should expect a negative return one year in every five or so. 

Unfortunately, we can only ever be sure when a market has peaked or troughed after the event. 

A professional investment manager focuses on key market signals and investment fundamentals to catch major market trends rather than trying to time peaks and troughs to perfection. 

Looking ahead

Every new generation of investors has a pivotal experience where lessons are learned. For older investors, it may have been the crash of ’87, the tech wreck of the early 2000s or the global financial crisis. For younger investors, and many older ones too, the coronavirus pandemic will be a defining moment in their investing journey. 

Now that shares and residential property prices have rebounded strongly, investors face new challenges. That is, how to make the most of the prevailing market conditions while ignoring the FOMO (fear of missing out) crowd. 

By choosing an asset allocation that aligns with your specific objectives, age and risk tolerance, you can sail through the market highs and lows, making smart tactical asset allocation shifts along the way, with your sights firmly set on your investment horizon.  

We’re here to guide you through the highs and lows of investing, so give us a call if you would like to discuss your investment strategy.