We cannot discount the possibility of a stock market crash. Investment values could hold steady this year, but we do not know how 2021 will affect the stock market. It might be a bumpy ride! The market uptrend is looking healthy at the start of 2021… But, with the current political climate and volatility, a new administration taking power, and pandemic impacts, etc… it is less likely, or even unlikely to continue. So, do not make judgements on your hope that this trend continues. It’s not just the current climate, but history proves this as well. You need to be ready for rotation in the market!
“The upshot: History shows it’s possible for the Nasdaq to register a third year of double-digit returns given its broad exposure to tech, which is highly levered to innovation,” said DataTrek co-founder Nicholas Colas. “But it’s tough to surprise markets three years in a row.”
2020 threw many obstacles in the way and here are 8 lessons to take with you in the new year:
1. Diversification Matters
Spread your investments around so that your exposure to any one type of asset is limited! This will help reduce the volatility of your portfolio over time. Instead of focusing just on funds, try pursuing alternative investments like private equity opportunities, real estate investments, and then ad commodity focused funds, and asset allocation funds. With the primary goal to maximize your returns, changing your asset allocation can tighten the swing without giving up too much in the way of long-term performance. This is a concession that a lot of investors might feel is worthwhile! While considering your asset allocation, keep in mind your time horizon and your risk tolerance. A diversified portfolio is by far, the best foundation of any smart investment strategy.
2. Big Picture – Big Returns
This means keeping a long-term perspective, not just making long-term investments. Training yourself to think of the big picture first, will give you the ability to think clearly in a market crash; processing the information and accurately strategizing the best plan of action. Avoiding poor investments is just as important as finding top stocks to buy. We know this is not always easy because most of the investment-related news is short-term in nature… The market is up one day and down the next, but make sure you remain focused on your big picture by knowing your investment history, staying invested, and developing a comprehensive investment strategy. Make every move you make in 2021 count towards your long-term goal!
3. Rebalance & Strategize
Investors should always think about how they can balance their risk comfort levels against their time horizon. Some demand for certain goods and services may not pick up until 2021. A good place to rebalance is in a 401(k) or IRA, where there are no tax consequences.
4. Age base allocation of assets
When an investor is on the brink of retirement, an overly aggressive portfolio is not the best strategy. Likewise, if you are in your 20’s, a bond-heavy portfolio is typically way too conservative. Opportunistic investors with longer time horizons may want to shift their focus. In both cases, however, diversification is still particularly important.
5. Cash on Hand
Stocks could be volatile in 2021 as our great nation continues to grapple with the pandemic and politics. So, keeping a healthy sum of cash will keep you ready and help you avoid having to liquidate other investments at a loss when you need money. Another added benefit is if stocks fall, you will have a prime opportunity to buy… considering you have enough cash on hand.
6. Patience is Paramount
Warren Buffett’s most popular quote, “The stock market is a device for transferring money from the impatient to the patient” is something to remember no matter where you are in your investment lifecycle. Even after you have assembled your portfolio, you will need to remain patient as your target stocks slowly start to compound and gain value. The lack of patience can cause even the most experienced of investors to make short-sighted decisions that can trigger long term severe impacts. So, do the best you can to see past the short-term volatility in the value of your investments and remember that patience can be your most valuable investment asset in 2021!
7. Quality Over Quantity
Another crucial quote Warren Buffett is notorious for saying, “Price is what you pay; value is what you get”. It is much better to pay a bit of a premium for a high-quality business that has some value before you invest. Choose a few good high-quality investments that are likely to help you meet your long-term goals. A high-quality investment is one that offers you a food value per dollar. Does it have staying power? Can it withstand the vagaries of the market and come out ahead? Owning a high percentage of a poor company will not bring good value. Better yet, owning fewer shares of a solid investment is much more likely to weather the times.
If you follow Investor Events, then you are obviously more creative than the typical investor that has ideas that go far beyond stocks and bonds. The one thing you do not want to do is to remain a prisoner of stocks and bonds, especially when those markets look a little brittle.
So, if you are heavily vested in public markets at the beginning of 2021, make sure to keep these lessons in mind to guide you through alternative investment opportunities that could make 2021 your best year ever no matter what the stock markets do.
May all your investments bring you happy returns.