Hard as it may be to comprehend, it’s now five years since the Covid-19 pandemic sent the UK into lockdown. It was on 23 March 2020 that the UK and devolved governments first ordered people to ‘stay at home’, with further lockdowns following over the following couple of years.
Experiences at the time varied hugely, and that included the impact on our finances. At one end of the spectrum there are redundancies, pay cuts, furloughs and spiralling debts. At the other end were many households that benefited from an enforced period of reduced spending, giving them extra savings to stash away. The UK savings ratio – the percentage of disposable income saved in a household – jumped from 9.6% in the first three months of 2020 to 29.1% in the second quarter.
And while some of the wider effects of the pandemic continue to ripple, five years on we have a better view of what we learned from the perspective of savers and investors. Here’s some of the lessons that might be worth taking on board.
Panic didn’t pay
Global shares dropped by more than 30% in February and March 2020 as the terrible scale of the Covid-19 pandemic became clearer. The stress and uncertainty of the situation caused investors to panic and make knee-jerk decisions. While some needed to access their savings and investments to support them financially, many others will have been left worse off over the long term by their short-term decision making. A fifth of investors said they were more likely to sell their investments given the volatility at the time, according to Columbia Threadneedle research.
But patience did
The stock market rebound in 2020 was very quick, taking many seasoned investors by surprise. It was driven by several factors, including the actions taken by governments to shore up economies and the rapid emergence of stock market ‘winners’ amid the chaos. Between 19 February and 23 March 2020 the US S&P 500 index fell 34%. By early June it had rallied by 44%, more than offsetting the earlier losses. In other words, those who sold out in March 2020 will not only have converted paper losses into actual losses, but they also missed out on the best of the recovery.
Most noise is a distraction
Much of that panic was fuelled by the sheer volume of noise that accompanied the arrival of Covid-19. With so much uncertainty about the present and future, investor sentiment was influenced to an unprecedented degree by social media (which had been in its infancy when the global financial crisis unfolded). The sheer noise surrounding crises such as the pandemic can make it difficult for clients to think clearly about their own investment objectives. Instead, decisions tend to be driven by emotions such as fear and anxiety. As renowned investor Benjamin Graham wrote in ‘The Intelligent Investor’, “the investor’s chief problem – and even his worst enemy – is likely to be himself”.
Drip feeding works
One way to take some of the emotion out of investing is to take the little-and-often approach. Drip-feeding your investments month-by-month can help prevent you from fixating on market noise or short-term volatility. Just missing out on a handful of good days can have a devastating impact on your total returns. Drip-feeding does away with all this, as you no longer have to worry about investing at the ‘wrong’ time.
On top of that, drip-feeding money into investments during a downturn means you’re buying more units of investments when prices are low and so getting extra reward when prices rise again. This also means you’re effectively smoothing out the highs and lows in prices, over time.
Predicting winners and losers is harder than it looks
The lockdowns of spring 2020 saw investors pile into stocks that would clearly benefit from people having to stay at home, such as Peloton, Zoom, NetFlix and ASOS. The stocks left at the biggest disadvantage lost heavily, such as those in the leisure, travel, hospitality and physical retail sectors.
But while the likes of Zoom and Peloton saw their share prices rise sharply, it didn’t last. Conversely, some hospitality and travel companies have bounded back strongly, reflecting a post-pandemic appetite for travel and experiences. In other words, if you’re going to dive into short-term opportunities you’ll need to know when to do so and when to sell out – and unless you’ve got a very effective crystal ball, that’s a tough ask.
Photo by Martin Sanchez on Unsplash
