We are in a new year, a time when many of us pause to reflect on our goals and aspirations for the year ahead.
Top of mind will be our finances and ways in which we can place ourselves on a path of sustained financial improvement. For some of us, these thoughts are percolating through our minds at a time when we may be in possession of extra cash from our year end incentive payments, or our National Housing Trust refunds.
These thoughts may also be commingling with memories of 2020 in which the novel coronavirus pandemic and the measures implemented to stem the spread of the virus resulted in a systemic global recession that adversely impacted the performance of financial markets. While the events of 2020 may have left some investors shy, they have provided a few lessons that we can leverage to build a robust investment strategy that will enable us to meet our investment goals.
A key takeaway from the events of 2020, is the importance of diversification. Diversification is an integral part of the portfolio construction process where investors allocate across asset classes to reduce exposure to the volatility of any single asset class. Typically, a diversified portfolio will feature allocations across the three main asset classes: cash, fixed income and equity with weights varying based on the investor’s risk appetite.
While diversification is typically described as a risk management strategy, it could also serve an opportunistic strategy that could enable you to take advantage of market fluctuations like we witnessed last year through rebalancing your portfolio.
The unprecedented developments of the past year also underscored the importance of periodic portfolio reviews with your investment advisor.
These discussions provide an opportunity to comprehensively assess the performance of your investment portfolio in relation to your investment goals and to rebalance your portfolio allocations in light of any changes in your investment profile which may have occurred. This periodic rebalancing will help you to manage your portfolio risk exposures and ensures that they align with your risk profile as it evolves over time. Investors who maintained regular portfolio reviews prior to the onset of the pandemic were less likely to have been overwhelmed by the noise of the market, they remained focused on their investment goals and tended to avoid knee-jerk reactions that would have resulted in the realisation of substantial losses on their portfolio.
THE PROGNOSIS FOR THE INVESTMENT LANDSCAPE
Some experts caution that the pandemic will continue to weigh on economic activity, employment, consumer and business confidence and that any meaningful economic recovery will be stymied until vaccination programmes reach a critical mass of people across most countries, implying restrictive measures will continue to feature prominently until this target is met. Notwithstanding, global financial markets have rebounded, replacing the losses experienced in last year’s dramatic collapse, with some markets reaching all-time highs. In the meantime, our local financial markets remain largely muted with green shoots in some segments signalling a normalisation of the investment conditions and present opportunities for investors.
There are signs that following a general retreat in 2020, investors are slowly returning to the local stock market, as evidenced by the successful public offerings by a number of issuers in recent months. However, we remain cautious as the number of confirmed cases continues to accelerate in the leading markets and with this resurgence comes the possibility of the reintroduction or tightening of containment of measures in the near term, which could delay the pace of wide-scale market recovery.
WHERE DOES THE INVESTOR STAND AMIDST THESE DEVELOPMENTS?
Despite the high level of uncertainty surrounding the time frame within which the pandemic will be brought under control there are opportunities that investors could consider as they seek to level up their financial position. With a properly diversified portfolio, an investor will be able to hold through the volatility that may be induced by the uncertainty while realising the benefits of the opportunities being presented by the markets.
The time to make the most of these opportunities is now; but proceed with caution.
Be clear about who you are as an investor. Your financial advisor can help guide you in making this determination. At Scotia Investments, this is achieved by considering or revisiting a number of factors, including your investment time horizon or the length of time you intend to hold your investment before you expect to start taking funds; your experience with investing or investment products; your knowledge of the relative risk and return characteristics of various investment options; your need for cash to deal with expenses; and your current lifestyle and investment habits. Where you stand with respect to each of these considerations will collectively determine your investment profile that can range from conservative or low risk at one end of the spectrum to aggressive or high risk at the other end. The investment profile will then imply a portfolio allocation which is customised to your needs and includes a mix of investment assets, which is geared towards achieving your goals within an agreed timeframe.
The events of the past year have contributed to the current evolutionary financial market developments and are providing early opportunities to set yourself up for success in 2021 and beyond. It is now time to act.
Apply the learnings, create a diversified portfolio that aligns with your investment profile and conduct periodic reviews with a trusted investment advisor.
Sharnakae Stewart, CFA is the Assistant Vice- President – Business Analytics, Strategy & Portfolio Advisory at Scotiabank.