Is 2021 a hangover year for investments?

Twenty-twenty is now behind us and most of us breathed a collective sigh of relief.

Thankfully, our worst fears about the health impact of Covid-19 on our country have not come to pass and to date the economic impact on most households has been muted.

From an investment perspective, 2020 was a very strong year with growth-focused investment strategies posting double-digit after-tax returns. This was a far cry from many predictions that were made at the start of the global pandemic.

However, this does beg the question, could 2021 be the hangover year; the year in which the economic stresses that were anticipated in 2020 finally have an impact?

In last month’s column, I commented on the many doom merchants whose expert predictions in such areas as housing were proved to be completely wrong; so I am certainly not going to be advocating becoming overly pessimistic at this point.

It is worth asking the question, are there specific actions that I should be taking with my investment strategy at this point?

Asset allocation

As I have mentioned before (but it bears repeating) your asset allocation determines more than 70% of your investment return. After a period of very strong growth, it is important to rebalance your portfolio back to your agreed asset allocation.

This may involve the counterintuitive process of moving some capital away from the fastest growing parts of your portfolio and potentially investing in areas where the performance has been more subdued.

The key point here is you need to maintain the asset allocation that is consistent with your age, stage and personal views on risk. Failure to do this tends to lead to the concentration of risk in potentially overvalued assets.

If we do see a strong downward market movement then it is possible that you will give up more of your hard-won gains than if you had rebalanced correctly.

Management style

The debate between the merits of so-called passive investing (sometimes called index investing) v active management continues in various media. Personally, I am of the view that it pays to be agnostic on this issue and be willing to move between styles.

With twenty-twenty hindsight we can now see that investment returns in the year 2020 were as much driven by the companies you were not invested in as those selected.

It was a year where active management to help protect capital during the strong downward swings added considerable value. The ability to then re-engage by moving to overweight exposure to the more favoured sectors of the stay-at-home economy drove very strong performances.

I suspect that 2021 may require the same level of active management and may be a year that favours an active approach once again.

Have a plan

It probably won’t come as a surprise that I am a strong advocate of the planning process. For retired clients, the cash-flow modelling part of the plan enables them to see the sustainability of regular future drawings.

When we see periods of excess return, as we have just experienced, it is often a prompt to bring forward intermittent expenditure such as house maintenance or vehicle replacement. A plan provides the confidence to make such withdrawals in the knowledge that it is unlikely to compromise future drawings.

I am sure that in 2021 investment markets will be volatile at times; delays in the global distribution of vaccines and questions about the emergence of new strains of the virus will no doubt have an impact.

However, I am confident that a well structured, properly diversified and managed portfolio will continue to provide the best protection of wealth in an uncertain world.

  • Peter Ashworth is a principal of New Zealand Funds Management Limited, and is an authorised financial adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.

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