Well what a year 2020 has been. Billions of pounds of dividends suspended or cut entirely. The Rolls-Royce share price yo-yoed like an AIM oil stock, as did the share prices of many other FTSE 100 companies. At the year draws to a close, it’s hard to know what 2021 will bring.
Having said that the future is always uncertain and trying to second guess it is a fool’s errand. We know most gamblers lose and that’s because humans can’t predict the future in any meaningful or consistent way.
So what does that mean for investing?
If we realise this and have the humility to accept the market – like life – often acts in mysterious ways we can come up with strategies to invest better.
For example, we can invest systematically – setting aside say a percentage of our disposable income for adding to an ISA or a SIPP. That way we can ride out the ups and downs of the market.
You could also invest a certain amount in a fund or a tracker each month. If you don’t have the time to research individual shares this could be an especially attractive option.
The point is not to overthink and try to second guess what the future might hold. Often news you’d expect to boost the stock market doesn’t and vice versa. The best way to invest is to buy great companies at a fair price. That is what I think should be the focus for any investor.
Knowing that markets are often hard to time you can of course run your winners and average up as many private investors do successfully. Conversely you can cut losers early as is advocated in The Art of Execution by Lee Forman-Shor – a book well worth reading in my opinion; no matter what you’re investing style.
Perhaps also given gambling is for fools and investing is for making money we should have at least some diversification in our portfolio. How many stocks to hold is a hotly contested area of debate and the right answer varies from person to person. What’s clear though is that owning too few shares (I’d say less than five) is risky while owning too many (say greater than 50) turns your portfolio into a de facto tracker.
Lastly, we should most of all keep a rainy day fund. The next market slump could come from anywhere as could a dramatic change in our own personal circumstances. It’s not nice to think about, but burying your head in the sand isn’t an option. Like the Scouts you need to be prepared.
What will I do in 2021
In 2021 I aim to rebuild my portfolio having used a significant amount of my investments to put down a deposit on a London house.
I remain committed to focusing on dividends as part, and just as part, of my investing strategy. 2020 has given me a greater appreciation of growth shares, as have many private investors on social media, in particular Twitter. Investors such as @ThreeHalfPenny and @wheeliedealer and many others have interesting updates and thoughts on investing.
So I’ll be looking for shares that combine income and growth potential. On top of that I’m likely to add some funds, trackers and investment trusts that give me exposure to shares from beyond the UK. I’m particularly keen on US Smaller Companies, Asia, and potentially Vietnam specifically, as well as yield-focused investments.
If dividends do come back next year and the stock market recovers well as some expect then that’ll be good for future compounding. So I plan to pick up dividend paying shares at fair value and then hold them for as long as I can.
Most of all I’ll ignore noise. There’s always something around to unnerve investors, from negative interest rates, to inflation, to trade wars and much more besides. But whatever is happening in the UK or the wider world there’ll be opportunities for savvy investors to make money. The UK market I think still offers a lot of potential, from the large caps all the way down through to small caps.
If you’ve enjoyed this article please also read my previous article – a roundup of 2020, including some winners and some losers from my own investing.