It feels like we just celebrated the New Year’s Eve and here we are almost mid-January already excited and looking forward for a vibrant 2021. Yet despite the intense chaos in 2020, stock market returns ended up being a bright spot in a dark year for many investors.
In fact, as per Prime Investor, the Nifty50 index finished with a gain of 14.17%, Sensex at15.75% for the year.
There is no denying in the fact that market performance only looks smooth in retrospect. Breathing through it was a suffocating experience for investors, especially during March and April. Thanks to this phase which made sure the investors questioned their overall strategy in a never-ending loop.
The decisions that were made during this brief period of time had a long-term impact on ‘how a portfolio performed through year-end’.
Interestingly enough, there were actions taken in 2020 that should be applied to portfolio construction going forward.
Investors who maximized their investment returns in 2020 were found to have followed three basic strategies, including having the appropriate amount of fixed income in their portfolio, staying invested and continuing to buy throughout the year.
While they may have had some uncomfortable moments while navigating the markets, they are reaping their rewards as we move into the new year.
During the crash that happened in late February, investors were faced with a dilemma.
Most of them instantly picturized the 2008-09 economic crises, and at that very moment, everyone was left with no option but to conclude that this pandemic is no different.
Therefore, “Should I sell and wait out the pandemic or stay invested?”, became a prime question.
In such an ambiguous juncture, at least until a suitable vaccine was put into place, one thing remained crystal clear, i.e., the underlying fundamentals of the market.
Another prominent realisation of ‘trying the wrong idea of outthinking the market’ was recognized. Even if they had guessed correctly on when to sell, re-entering in the market became the greatest puzzle.
Staying invested and riding through the volatility, the hope was that ultimately in the long term the market would return.
It was a calculated decision that paid off.
The Buying Mantra
You must be wondering that just previously ‘buying’ was a puzzle yet how did the odds favour us!
Experienced investors also realized another key element of achieving successful market returns is knowing when to buy.
After all, isn’t the old joke, buy low and sell high?
But as accurate as that mindset is, actually buying during a downturn is psychologically difficult. In a crisis, human instinct is to flee to safety. The idea of investing more money in a market that appears to be crashing can feel foolish.
Long-term plan should be our key focus.
Firstly, having the right fixed income allocation allows the investor to weather out the challenges in these markets.
Second, what many high-net-worth investors found is that rather than giving in to their emotional impulses, it is always better to consistently be buying in the equity markets. A dollar-cost average strategy can help ease the heartache out of making these decisions.
Further, those who pumped fresh money into the market – particularly at the bottom – have been rewarded for their courage with returns in thein the range of 55%-60%. While these are short term returns, it’s evident that investing when others are running scared can make a difference (ultimately it would be a huge difference).
Strategy before Tragedy
As investors look to 2021 and hope for a better year ahead, they should engrave these lessons in their heart. Retail investors might feel the pain of volatile markets, however, high net worth investor’s responses are often more measured.
Take a page from their strategy and focus on staying invested in the right allocation and buying consistently throughout the year.