Stick to investing in stocks in 2021 and give it time
The market was a little happier at the start of 2021. The development of vaccines to counteract
the covid-19 pandemic obviously helped and was enough to allow investors to largely ignore the tightening of restrictions as the new variant of the virus wreaks havoc. And there are many other developments that could influence the behavior of companies, sectors and, indeed, markets, not least of which Brexit and the White House change of leadership. But first, let me put my value on the time versus timing debate.
A matter of timing
Having spent over half a century in the investment world, I firmly side with time in the market – and not just because that’s one of Warren Buffett’s most cited aphorisms.
One need only look at a few of the top performing fund managers to realize that they prefer to focus their efforts on picking companies that are likely to deliver the returns they want, rather than looking to time to perfect their entry. and their exit from the market. Nevertheless, I too have fallen into the trap of trying to be too smart in terms of timing, despite my long experience.
At the end of 2006, after taking early retirement from a large bank, I discovered the term “subprime” for the first time. A respected analyst released a report drawing attention to the propensity of some lenders in the United States to advance money to those with poor credit ratings and then bundle the loans into investment vehicles that could be sold to investors, such as pension funds.
The appeal to buyers was the high returns offered by these products, but with many of these loans secured against homes and with house prices falling in America, the analyst warned of a looming financial crisis. It encouraged me to sell a lot of stocks. Of course, the analyst was right, but the real financial crash did not come until 21 months later and in the meantime the markets rose further.
Granted, at the ensuing bear market low, my sales from two years ago seemed premonitory, but no one is ringing at the bottom – or the top for that matter – so I didn’t reinvest when I should have. .
There are many surveys that show that if you are out of the market at key turning points your performance is likely to suffer, so now I am a buy and hold investor.
Looking at how the markets have behaved in what has proven to be very difficult over the past 12 months, it is clear that you should have been incredibly lucky to turn the volatility that developed into significant gains.
The United States, which has arguably had one of the worst experiences of the pandemic, has consistently reached new heights at the start of the year. China, where it all began, also had a strong stock market performance. Here in the UK we’ve seen a duller picture and we can’t really blame Brexit as our benchmark Footsie has a preponderance of international companies in its makeup, less vulnerable to economic disruption at home.
While recent performance has shown some improvement, we are still well below pre-Covid-19 levels. Indeed, the increased craze for UK listed equities probably owes as much to the belief that M&A activity is likely to increase here as to the deployment of different vaccines.
True, US companies compare the valuation levels at which their companies are trading with the less demanding criteria demanded of UK companies and draw understandable conclusions. Not that speculative activity alone should never be seen as an argument to expect another bull market.
The safest option
That said, most of the research I read now points to the likelihood of a significant rebound in economic activity by the second half of this year. Experience has taught me to be naturally skeptical when there is such a widespread consensus of opinion, but we are in a situation where herd immunity could be increasingly impaired as vaccination plans are made. deployed around the world, when it is clear that governments and central authorities and banks will do everything in their power to restore economic well-being.
And what are the alternatives? Money hardly brings anything back. Bonds carry some risk if inflation rises, as it could. Gold does not earn anything at all, while cryptocurrencies continue to mystify me about their attractions. It seems the best we can do is stick to our commitment to stocks, at least for now. Timing an exit from the markets is never easy and knowing when to return is a gift simply inaccessible to mere mortals. While sectoral and geographic adjustments may be worth considering, it looks like Buffett will win again. Time in the market is the safest option.