3 investment lessons the pandemic has taught us

It’s been over a year since the UK was thrown into the first nation-wide lockdown.

There’s little doubt that lockdowns have been extremely difficult and deprived us from the things we enjoy and look forward to. But it’s taught us not to take the basics for granted and to appreciate the smaller things in life – whether that’s a freshly-poured pint at your local pub or being able to meet up with your nearest and dearest.

There have been plenty of valuable lessons in the investment world too.

As the light at the end of the tunnel draws ever closer, we take a look at three investment lessons the pandemic has taught us.

This article isn’t personal advice. Unlike the security offered by cash, all investments rise and fall in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, ask for financial advice.

Expect the unexpected

Cast your mind back 12 months. Nobody could’ve possibly predicted the devastating impact the pandemic would have on the way we live our lives and our finances.

Millions of workers have been placed on government-supported job retention schemes, businesses have been forced to close their doors and sadly lots of people have been left jobless. Lots of listed companies were forced to cut or reduce their dividends to shore up the balance sheets – UK companies slashed dividends by more than half in 2020. All of these factors have unexpectedly shrunk household income for many families.

It’s a lesson on why it’s always important to keep some spare cash tucked aside in your ‘rainy day’ pot.

The amount people should hold in cash will be different for all of us. But in general, it’s a good idea to hold around three to six months’ worth of spending as cash to cover emergencies. If you’re retired, then you should hold more – we think one to three years’ worth is sensible.

This can help protect you against any income shocks like unemployment or reduced earnings, and spending shocks like having to repair your car.

Any planned spending in the next five years that can’t be covered by your household income should also be held as cash.

We recommend all investors have emergency cash available before adding more to their investments.

How to make the most of your cash savings

Lesson #1 - prepare for the worst. You never know what’s around the corner.

The stock market isn’t the economy

The stock market and the economy have followed two very different paths since the pandemic.

To check how smoothly an economy is functioning, you’ll need to look at their gross domestic product (GDP). It’s a measure of the overall size and health of a country’s economy over a period of time (usually three months or one year). It’s also used to compare the size of different economies at different points in time.

When GDP goes up, the economy is growing – people are spending more and businesses are often expanding. The opposite is true when GDP goes down.

2020 saw almost all global economies’ GDP fall off a cliff-edge. Restrictions meant several sectors ground to a halt and people spent less. Lots of countries were sunk into a coronavirus-driven recession after having at least two consecutive, three-month periods of declining GDP. Believe it or not, the only economy to grow in 2020 was China. But even the economic powerhouse only managed to grow by 2.3% – their slowest annual growth rate in more than 40 years.

Despite the state of the global economy, stock markets around the world painted a different picture altogether. Apart from the initial short, sharp drop, market indices globally have recovered their losses and continued to grow – reaching record-high levels in most cases.

Global stock market performance since the coronavirus outbreak

Scroll across to see the full chart.

Past performance isn’t a guide to future returns. Source: Lipper IM, to 31/03/2021.

A combination of government stimulus packages, record-low interest rates, fast-growing technology stocks and vaccine announcements have helped stage the comeback. The surge in new investors with more time and money on their hands has also given markets a boost.

The UK has stumbled behind global markets in recent times, but has caught up ground since the Brexit deal was agreed and the continued success of the vaccine rollout.

The key point in all of this is that the stock market and the economy don’t always work in tandem like you’d expect, at least in the short term.

Over shorter periods of time, how your investments are doing is largely down to investor sentiment. But also the future expectations of the economies and companies you invest in, rather than the here and now. That’s exactly why investors should avoid making any rash decisions when stock markets start to fall.

Yes, the start of the pandemic was painful to watch as shares were sent tumbling with some of the biggest daily falls in history. But if you look back at other stock market drops, like the dotcom bubble, the financial crisis and now the pandemic-induced crash, they all have one thing in common – markets have recovered. Remember that past performance is not a guide to the future.

Investing for the long term (that’s at least five years or longer) and holding a diverse portfolio is your best chance of investing success. Over very long periods of time stock markets and economies do tend to move together. And investing across different investment types, sectors and geographies can help spread out your risk which can help shelter your investments during market falls.

Learn more about diversification

Lesson #2 - stock markets are unpredictable. Stay calm, stay diversified and think long term.

Social media’s influence on stock markets

Like it or not, social media platforms offer an easy way for stock influencers to connect with their millions of followers online. Lots of these followers have a growing allegiance towards these influencers and take their comments on the market as gospel. We’ve seen this move share prices throughout the pandemic. It’s important to remember that market influencers post about buying stocks because they often have ulterior motives or are being paid to promote them.

The shares they mention are often speculative and very high risk. We think investors should avoid making investment decisions based purely on other people’s opinions, unless it’s professional advice from a qualified financial adviser.

Why you should think twice before buying ‘hot’ stocks

As investors, each investment we own should have a rationale behind it which aligns with our investment goals and attitude to risk. “My friend told me to buy it”, “The stock is going to go up” or “I saw someone tweet about this stock” aren’t reasons to buy an investment. If you can’t explain what the company does, why you own it and how it fits into your overall investment portfolio, then you probably shouldn’t hold it.

You wouldn’t book an expensive holiday without reading the hotel reviews or finding out about the local area.

The same applies to buying stocks – investors do their research. Sometimes stocks don’t perform like you’d expect, just like sometimes the hotel doesn’t always look like the pictures.

To help with your research, you can get the latest market reports, news and expert insight from our equity analysts by signing up to our share research.

Lesson #3 - don’t invest purely based on other people’s opinion. Know what you own and why.