To say that 2020 has been a watershed year would be an understatement.
The COVID-19 pandemic has tested us in ways we could have never imagined.
Even the 2008 Global Financial Crisis, which led to a near-collapse of the US banking system, was not as diverse in its impact.
The current pandemic may have started as a health crisis but has since morphed into a humanitarian and economic crisis.
Investors also got a taste of how to handle risk as stock markets around the world experienced the swiftest crash in living memory.
The speediest bear market in history has left an indelible mark on many investors, who were caught off-guard by the ferocity of the sell-down and the collapse in valuations and earnings.
As 2020 draws to a close, you may be breathing a sigh of relief that a turbulent year is finally going to be over.
With several promising COVID-19 vaccines announced last month, 2021 may offer some respite from the challenges both individuals and businesses have faced during the year.
And yet, we should not leave behind the lessons that we learnt so far from this crisis.
I am a believer in continuous learning, whether from successes or mistakes.
And so I’ve come up with five ways to strengthen your investment portfolio and prepare you for a year of recovery.
1. Re-examine core assumptions
First and foremost, you should have a look at all the businesses within your portfolio and rigorously re-examine their investment theses.
The pandemic has swept over numerous industries like a tsunami, damaging some irreversibly while altering others in subtler ways.
You need to revisit your own core assumptions to see if these still hold true, and if the investment makes sense going forward.
Take the aviation industry for instance.
SATS Ltd (SGX: S58) was on a promising growth trajectory before the pandemic.
With a booming aviation industry, the planned construction of Changi Airport Terminal 5, and record numbers of inbound tourists, the company seemed primed for success.
However, COVID-19 has slammed the airline industry hard as border closures and lockdowns grounded airlines around the world.
For its latest quarter, the group’s revenue was more than halved, pushing it to a minor loss.
Its dividend, which was rising steadily up till the fiscal year 2019, was also suspended in light of challenges brought on by COVID-19.
Given the challenges, investors need to ask themselves if the investment thesis for the business remains valid, or if their capital could be better deployed elsewhere.
2. Explore new growth catalysts
As you challenge the assumptions behind your investment ideas, you should also keep an eye out for new opportunities.
Interestingly, the crisis has created a bifurcated market.
Affected sectors and companies were badly hit by the crisis and have struggled to recover.
But there are other sectors, such as rubber gloves, financial services, software-as-a-service and cloud computing, that have boomed because of this crisis.
As an inquisitive investor, you should continually seek out new and fresh opportunities to park your capital for superior returns.
Top Glove Corporation Berhad (SGX: BVA), the world’s largest rubber glove manufacturer, has seen its net profit soar twenty-fold year on year in its latest quarter which ended in November.
Demand is so strong from the healthcare sector that the lead time for nitrile gloves grew to 17 months, significantly higher than the typical lead time of 30 to 40 days before COVID-19 struck.
As a result, the group’s shares have more than quadrupled year to date and the business continues to boom with strong tailwinds that should carry it through the next couple of years.
Another example is video conferencing company Zoom Video Communications (NASDAQ: ZM), which provides a cloud-based platform used for teleconferencing and online communication.
The pandemic had accelerated the adoption of videoconferencing tools as more companies went online to facilitate the shift towards telecommuting.
For the third quarter, Zoom’s revenue more than quadrupled year on year to US$777.2 million, while net profit surged from just US$2.2 million in 2019’s third quarter to US$198.4 million in its latest quarter.
Zoom’s share price has also been on a tear, up more than five-fold from US$68.72 at the start of the year to almost US$400 at the time of writing.
By exploring growth ideas arising from the pandemic, you can position your portfolio for continued success into the new year and beyond.
3. Revisit risk factors
The pandemic has reinforced the importance of risks, as many investors have been blindsided by the swiftness of the downturn.
During good times, it’s natural to focus on returns and play down the associated risks.
But as we continue to grapple with major disruption to our lives and businesses, we should be wary of any shift in risk profile for your investments.
Ask yourself if any additional risks have arisen that may render your previous investment thesis invalid.
Or it could also be a case of an existing risk that has been heightened by the presence of the pandemic.
By reviewing the changing risk profile surrounding the businesses you own, you become better equipped to handle any surprises that come your way.
4. Boost dividend certainty
While a wide swath of companies has slashed dividends to conserve cash, there have been a handful that either kept dividends constant or even raised them significantly.
For investors who rely on a steady flow of dividend income, searching for businesses that have managed to maintain or increase their dividends is a good way to segue into the new year.
Some examples include Sheng Siong Group Ltd (SGX: OV8), which doubled its interim dividend this year, as well as Nike (NYSE: NKE), which recently announced its 19th consecutive annual dividend increase despite temporarily shutting the bulk of its stores earlier this year.
This dividend certainty, coupled with a business that remains resilient during the crisis, will position you well for the new year.
With a steady, consistent stream of dividends, there is also the option to compound your wealth by reinvesting those dividends in promising growth companies.
5. Keeping some cash handy
While many investment veterans may advise you to stay fully vested as the recovery takes hold, I always believe we should keep some cash on hand.
Some will argue that keeping cash will cause a drag on your returns.
There is some truth to it.
However, what is often not mentioned is how cash can provide a significant return if it is deployed well.
The coming year may be marked by volatility as the world attempts to recover from the pandemic.
It could even be punctuated by surprises that we did not expect.
An uneven recovery could provide us with valuable windows of opportunity to put our spare cash to work.
If done well, the returns that we obtain could help us achieve the financial goals that we seek.
Note: An earlier version of this article appeared in The Business Times.
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Disclaimer: Royston Yang owns shares in SATS Ltd and Nike.