What financial lessons can we learn from 2020?
After several government lockdowns, state-mandated closure of entire sectors, plummeting financial markets, whole swathes of the population working remotely, on/off-trade deals, closed borders and a whole lexicon of new terminology, 2020 will go down in memory as one of the most volatile and unexpected in living history. The question is, what financial lessons can we learn from the past 12 months?
The importance of income security.
For most people, a regular and stable income is their lifeblood. Without it, rent or mortgages cannot be paid, cars cannot be financed and the basics we take for granted, like food and heating, start to become a luxury item. This year, many people in otherwise secure industries have seen their incomes fall dramatically through redundancy, working on furlough or businesses failure. As the BBC reports, the biggest declines in payroll were seen in hospitality, retail and manufacturing.
Declines in payroll by sector.
The biggest lesson we can learn from this year is to protect our incomes at all costs. This could manifest as:
A ring-fenced emergency fund of 3 to 6 months of your total household expenditure;
Purchasing income protection insurance with redundancy cover;
Spreading your risk by having multiple part-time jobs in different industries (often referred to as a ‘side-hustle’ these days…).
The basic premise of all these options is to spread your income risk over various sources and to save for a rainy day.
The importance of being in the right home.
For many, a home has in previous years been just a place to rest your head. However, with the various lockdowns, social-distancing and remote working, we’ve all been spending more time in our homes this year than at any other time. This extended period at home has led many of us to challenge our previous views on what we need from our homes and has prompted a lot of market activity, particularly in light of the stamp duty holiday. Some have found that they were over-committed to large mortgages and have decided to downsize, others have realised that a study/home office is a necessity and many more have decided to swap city life for the suburbs and villages.
In fact, this ‘property-reshuffle’ has led to an increase in property prices of 6.5% over the last 12 months, leaving the average property now worth just shy of £230,000. By many accounts, the level of market activity is slowing and is likely to fall even further once the stamp duty holiday ends in 2021.
The stock market will continue to rise and fall.
Many will have felt the shock of the market collapses when the pandemic started to bite in February this year. This affected pensions, retirements savings and the drops caused many investors to sell-off in early March. In a previous market update, we reiterated our advice that although it is understandable for investors to worry at times like these, investing is for the long-term and stock market falls should be viewed against this long-term horizon.
With the benefit of hindsight, we can see that the FTSE All-Share index has recovered from an initial fall of about -35% and recover to -13% from its February position. The S&P 500 on the other hand saw a similar initial drop of about -35% but has since grown to be +10% above its peak in February. As a result, we can learn that it is rarely wise to base long-term investment decisions on short-term market fluctuations. In 2021 we expect to see the markets further fluctuate as the UK finds its new place in a post-Brexit world and we start to see the impact of the global vaccination programme.
FTSE All-Share and the S&P 500 Index from Google Finance.
Some individual stocks have even performed really well, directly benefiting from the pandemic. For example, the online supermarket Ocado leveraged the lockdowns to increase sales, growing the share price by nearly 70%. ASOS also took advantage of the pandemic and people’s desire to wear new clothes on Zoom calls, resulting in a share price growth of 35%. Amazon has also been a winner and increased their share price by 47% whereas Zoom has gone from about $100 earlier in the year to end over 400% up at $400.
Ocado, ASOS, Amazon & Zoom share performance in 2020.
The government can flip things on its head overnight.
If there’s one thing we’ve definitely all been impacted by this year is the government’s ability to u-turn and flip things on its head overnight. Whether it’s tax changes like the stamp-duty holiday, new state-aid systems like the job retention scheme or their almost weekly introduction of tighter restrictions on businesses and personal movement, the key takeaway is that the freedoms and arrangements we take for granted can be taken away in an instant. Understandably, any government must do what it can to secure the health and jobs of as many as possible, but the financial impact is going to be felt for many years to come. In a previous article, we’ve discussed some new proposals for capital gains tax and pensions tax relief, however, these could just be the tip of the iceberg. As a result, it is crucial to know your financial plan and speak to an Advisor to take advantage of or just carefully consider any relevant, tax-efficient opportunities currently in place, before the next budget.
What’s next?
If you are interested in reading how early investing can dramatically affect your retirement savings, you can read our article on compound interest. If you need help or advice with your finances and investment decisions, you can talk through your options with one of our Financial Advisors right here in Tunbridge Wells.
This article offers information about investing and should not be taken as personal advice. Remember that investments can go up and down in value, so you could get back less than you put in.