3 lessons from 2019

The year 2019 could have taught us a lot in terms of investing, just as 2020 has already had to offer a good deal of lessons. It is the last time we look back at the previous year, and even against the backdrop of current events, we are happy to introduce you the basic lessons for the benefit of your investment.

Radoslav Kasík | Investment academy | 24. March 2020

Once again we will look back at the past year, which is already forgotten in the backdrop of current events surrounding the spread of coronavirus. Majority of intelligent investors and our readers hopefully still remember how 2019 turned out. If not, we are happy to remind you one last time. 

People have a very short memory and investors tend to forget about the past particularly quickly. However, the best lesson is exactly the experience and worng decisions. This is the reason why we are happy to dust off the past. It can always offer us irreplacable and priceless lessons for the future, perhaps even today.

If we looked at the beginning of 2019, we would find ourselves in the midst of difficult times for financial markets. The year 2018 ended on a gloomy note. All assets were closed in red, US stocks lost around 13% over the last three months of the year, and many investors had already back then identified themselves with a view, that a long-prophesized, larger decline on financial markets had begun.

The forecasts for 2019 simmered down compared to the previous year and were extremely cautious. At that time, we were getting questions from several of our clients whether it was appropriate to withdraw their investments and wait for lower market levels. Hundreds of potential clients postponed their investments, as a result of market developments and media reports. Does it remind you of something?

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Lesson 1 – markets are unpredictable

History will remember tha last year as one of the most successful years ever. The average returns on world equities fluctuated at around 30%, making 2019 the most profitable year since 2009, when stocks were getting back on track from massive slumps due to the financial crisis.

The calculated impact of omitting such a strong year on the overall return of an investment was perfectly summed up by Finax CEO, Juraj Hrbatý, in the article How much money did you lose if you postponed your investment?

But let’s try to look at January 2019 for a while. We recommend browsing through the media, going back in time on social networks, and reviewing financial market reports over the past year.

You will come across frequent pessimism and numerous predictions of crisis approaching certainty, as indicated by a few selected headlines from the Slovak media.

Indeed, when we look at the world around us and the developments on financial markets in the recent days,  the authors‘ forecasts have come true. And yes, today these headlines really look like accurate predictions.

In fact, though, none of the authors of these statements could have known that at the end of the year some COVID-19 virus would break out in China and spread, paralyzing the whole world.

Had this not been the case, we would most likely be witness to the continued growth of the global economy and financial markets, and these expressions would have been probably lost in the dust rather quickly. But even these are just another speculations, which we shall never know the answers to.

The spread of coronavirus is the perfect embodiment of the black swan. Such events are absolutely unpredictable. However, it does not mean that there is zero chance of a pandemic outbreak.

On the contrary, no one can ever rule them out, but neither can we expect them. Moreover, we have no way of knowing their exact timing. And that’s why we cannot adjust long-term investments accordingly and in advance.

Therefore, let us completely disregard any association of negative market forecasts, from the beginning of the last year or from the past decade, with the current coronavirus spread, even though many commentators and analysts will not leave their estimates in peace.

The fact, that market downturn is happening precisely within them predicted period, is nothing but a mere coincidence. Just as they could not have predicted the outcome of 2019, they had had absolutely no idea that in February and March the markets would plunge by double-digits as a result of coronavirus. If we always followed outlook of the media, we would probably never invest in anything.

The markets are unpredictable and no one is able to say with any certainty what the situation is going to be like in three months or in a year. The recession as well as slump in the markets is inevitable, however, no one can accurately estimate the onset. In effect, a strategy based on predicting the market situation is rather a speculation than an investment. 

Any efforts to tailor the investment to expectations only lead to worse results, which was clearly confirmed last year. And this is the basic and primary lesson of the last year.

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Lesson 2 – knowledge, experience, and education are the key to success

Instead of competing in sensational but unnecessary forecasts, towards the end of 2018 and beginning of 2019 we devoted our energy to educating Slovaks, which is the key to successful investments and coping with possible market fluctuations – witnessed not only towards the end of 2018, but even nowadays.

First of all, we tried to guide small investors how to act in the event of a market downturn. We wanted them to learn how to selectively ignore accounts and reports, which needlessly distract them from investing and try to teach them that risk is a natural and integral part of investments.

Our article on the 2019 investment outlook left many literally furious and led to both critical and sarcastic reactions. It took only a year until we were proven right and it turned out that you couldn’t have gotten a better recommendation last year.

It is truly incredible how the history repeats itself, and already during the creation of this article which was written in the span of nearly a month, we can calmly look back at the last year and recall the lessons that stood out back then.

Old seasoned market matadors say that the biggest lie of the financial markets, which the investors regularly talk about, is: ”This time it will be different.

That’s why it is very important for everyone to dust off our older articles listed in the links above, read them again, and hammer their message into your heads. We have prepared an article about coronavirus and market downturns, describing the current situation, likely scenarios, and our recommendations.  

We are very curious how will the financial markets end up in 2020, what is our reaction going to be like the next year, and what lessons will we draw from it. We already have an idea today, but we would be getting ahead of ourselves.

In the long run, however, the developments caused by coronavirus will present an incredible opportunity - and most people will regret the fact that, yet again, they had not taken advantage of it, they panicked, etc.. Don’t be one of them.

The only way to prevent investment disappointments is to gain ivestment experience, recognize its downside, learn, listen, understand the risks, and arm yourself with patience and resilience. And that is the second lesson of 2019.

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Lesson 3 – diversification is the key to success

As our last lesson, we will review one of the key prerequisites for successful passive investment – diversification. It is the distribution of risk among a large number of partial investments. 

However, we want to communicate it in a different way, i.e. through already traditional periodic revenue table that you may have already come across on our site. We have updated it with the last year’s data.

The table reveals the performance of all 10 asset classes, i.e. all 10 ETFs making up the Finax portfolios over the past 15 years. The column always represents one year and the individual funds are ranked top to bottom in each year (column), according to achieved revenue.

Each ETF is assigned its own color so you can clearly see when did its apprecitaion occur and how was the fund ranked. That is the point of the whole table. It aims to show that all assets classes appear in turns both in the top and the bottom rows of the table.

The table is supposed to illustrate that it is not worth betting on past winners or looking for them at all for the upcoming period. Investment strategy of many people is based on this exact method - purchasing funds with the highest current appreciation. However, it usually results in disappointment and distaste for investment, as the table itself demonstrates. 

No one knows who will the winner be next year. Just as the winners and losers, compared to the previous year, almost completely changed. The best asset class in 2018 became the worst in 2019 (government bonds) and the worst fund in 2018 turned into the second most successful over the past year (EU Small Cap). 

The benefits of diversification include not only the maximized spread of risk among the number of securities but also an assurance of always owning the current and future winners, in terms of achieved revenue.

Diversification and right allocation are, even today, the only solution for many people who speculate whether to move their investment into bonds now, and then later (but when?) move them back into stocks and so on.

We are certainly very curious what will the year 2020 bring and how will it turn out. We are basically at its beginning, still writing articles about 2019, and it has already been full of big surprises. We will certainly review it as well, this time next year. Remember this moment and your current feelings. It will definitely be interesting to recall them in a year.

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