5 really important lockdown lessons you must know if you’re asking “should I invest now?”

It’s fair to say that the last 18 months have had their fair share of twists and turns, and nowhere is this truer than with investments. While the markets rallied after the initial downturn in March 2020, there have been plenty of ups and downs along the way, meaning you might be asking yourself: “should I invest now?”

If you are, the Covid pandemic and subsequent lockdown has provided some valuable lessons about investing that could help you decide and become a shrewder investor. Read on to discover what they are.

1. Have an emergency fund

Nothing highlights the fact that you never know what tomorrow holds like the Covid pandemic! The impact it and lockdown had on millions of people shows how vital it is to have an easily accessible pot of money for emergencies.

You could have been one of the millions of people who relied on their emergency funds while making ends meet on a reduced income. That said, it’s not only unforeseen pandemics that could create this situation.

An illness or injury might cause an unexpected loss of income, which is why it’s essential to have a sufficient emergency fund before you consider investing. It provides a financial safety net that could significantly reduce the need to cash-in your investments if life throws you a curve ball.

Typically, you should have three to six months’ worth of living expenses in your emergency fund, to help cover any urgent one-off bills or provide an income if you can’t work.

2. Beware of panic selling – it could cost you dear

Investments go down as well as up, and one of the most common reactions to seeing your investments drop in value is to sell. It’s a well-documented reaction within the financial industry, backed up by behavioural science that tells us that the desire to avoid losses is natural.

During lockdown some investors panicked and sold their investments, although it probably deprived them of the future growth that might have recovered the losses.

To demonstrate this consider the following chart, which shows the performance of the MSCI World index since January 2020. The index shows the performance of a basket of companies from 23 developed nations and reveals how the value of the index has broadly increased since the initial drop in 2020.

As you can see, those who panicked during the early days of Covid and sold their investments in April 2020 could have missed out on the subsequent growth. Resisting the urge to panic sell could be critical to the success of your investments.

Please remember, past performance is no indicator of future performance.

3. The markets don’t always follow the economy

While GDP across the world fell during 2020, after the initial downturn at the beginning of 2020, the markets broadly performed strongly despite the global economy continuing to struggle.

An example of this is the Nikkei 250. It was 22.9% higher in January 2021 than January 2020, despite Japan’s economy shrinking by 4.8% over the same period. The Nikkei 250 reached its highest level in 30 years in February 2021.

This means Covid and the subsequent lockdown shows us that it’s not only worth considering investing when economies are strong. It might also be worth investing when they’re weaker too.

4. Diversification is key

A major lesson from the pandemic has been diversification. Diversifying your investments means your returns are not reliant on a single stock, or the performance of one sector in the market.

Another way to diversify is to invest in different regions across the globe. The graph below shows how stock markets in different regions performed during the pandemic up to January 2021.

Source: BBC

As you can see, if you were invested in Asia’s Nikkei and Shanghai indexes, their stronger performance would have offset the downturn in the FTSE 100 if you were invested in that too.

5. Always invest for the long term

The lockdown highlighted the importance of a long-term investment strategy, as having one could have helped investors ride out the market downturn in 2020. This is why financial planners typically suggest you invest for a minimum of five years.

Research by Nutmeg looked at the chances of generating returns from investing over different periods of times. To do this, it used global stock market data from between January 1971 and May 2020.

It found that if you had picked a day at random during that time and invested for one day, you would have had a 52% chance of making a profit. If you had invested for any 10-year period during that time, you would have had a 94% chance of making a profit.

As financial professionals will typically tell you: it’s time in the market, not timing the market, that matters.

Get in touch

If you’re asking: “should invest now?”, speaking to a financial planner could help you decide. They will help you understand the growth potential, the risks involved and whether investing might be right for you.

If you would like to discuss investments or your wealth more generally, please email me on a.douglass@grosvenorconsultancy.co.uk or call my office on 01793 766 123. Alternatively, call my mobile on 07525 177 046.

While I offer high standards of service and will work with you to ensure any plan is right for you, I’m also a busy mum, so work Mondays and Tuesdays only.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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