Investing is a continual learning process. Even the best investors such as Warren Buffett and Terry Smith, who’ve been investment champions for decades, are constantly learning from their experiences.
Here, I’m going to highlight five key lessons from 2020. In my view, these were some of the most important takeaways for investors.
Don’t panic when stocks fall
One of the biggest takeaways was that it’s crucial to stay calm and act rationally when stock markets are falling. I remember receiving a text message from a friend in March when equity markets were in full-on meltdown mode. He was panicking and contemplating selling his entire share portfolio. I advised him against doing so and suggested he take a long-term view.
Not selling his stocks turned out to be a good move. Since then, many of his stocks, such as Unilever and Legal & General, have recovered. Other stocks he owns, such as ASOS and Softcat, have climbed much higher.
Growth is important in investing
Last year, the companies that did well were generally those exposed to dominant growth themes, such as online shopping and cloud computing. By contrast, the ones that underperformed were generally those in struggling industries such as oil and tobacco.
The key takeaway here is that it’s important to focus on a company’s growth prospects when picking stocks. Quite often, investors tend to put a lot of focus on valuation. This approach can backfire as cheap stocks are often cheap for a reason.
The best investment strategy, in my opinion, is to focus on investing in good companies in higher-growth industries. This simple strategy can deliver strong results over time.
Dividend investors need to be selective
The next lesson was that it’s very important to be selective when investing for dividends. Last year, over 50 companies in the FTSE 100 index cut, suspended, or cancelled their dividends. Not only did owners of these stocks suffer from lower income but they also suffered from large share price falls.
High-quality dividend payers, such as Unilever and Diageo, didn’t cut their payouts however. Often, the lower-yielding dividend stocks are the most secure.
Stock picking can beat index funds
Another key investing lesson from 2020 was that active management can really add value in a struggling market. Last year, those who owned index funds got crushed in the market sell-off. Those in FTSE 100 tracker funds are still down significantly. However, investors who picked individual stocks were able to generate much higher returns.
By avoiding struggling companies and focusing on winners, investors can give themselves a good chance of outperforming the market.
It’s crucial to invest globally
Finally, in 2020, we were reminded of the importance of portfolio diversification and, more specifically, investing internationally. Last year, UK stocks, as a whole, performed poorly. The FTSE 100 index, for example, returned -11.5%.
However, my portfolio actually finished the year in positive territory due to my exposure to US stocks. Having exposure to stocks such as Apple and Microsoft made a massive difference to my returns.
The takeaway? When constructing a stock portfolio today, it’s crucial to think globally.
The post Investing: 5 key lessons from 2020 appeared first on The Motley Fool UK.
Edward Sheldon owns shares in Unilever, Diageo, Legal & General, Softcat, ASOS, Apple, and Microsoft. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Apple and Microsoft. The Motley Fool UK has recommended ASOS, Diageo, Softcat, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021