As we welcome the new year, I am sure many of us are eager to leave 2020 behind.
Last year proved to be one of the most turbulent periods in human history as the world faced a crisis of unprecedented proportions.
Although the fight is still ongoing, we now have a much better understanding of the enemy: the COVID-19 virus.
Moreover, the presence of more than one vaccine provides justified optimism that the end of the pandemic is not far off.
In response, stock markets have swiftly recovered and gained ground near the end of 2020.
It was never in doubt that investing entails significant volatility.
As such, it was understandable that investors would feel frazzled after the wild swings in share prices.
Now that we are stepping into 2021, it’s a good time to take stock of your portfolio and come up with strategies on how to ride the anticipated recovery.
Value to be found among laggards
The Straits Times Index (SGX: ^STI) was Asia’s worst-performing stock market last year.
Inclusive of dividends, Singapore’s bellwether index declined by 8.1% for the year.
There are few reasons for this weakness.
Our local banks, which make up a significant chunk of the local index, were advised by the Monetary Authority of Singapore to moderate their dividend payments to 60% of 2019’s total dividends in the name of prudence.
At the same time, massive provisions were also made in anticipation of loans turning bad due to bank clients facing financial stress.
The result was lacklustre earnings by the banks, bogged down by heavy provisions along with mandated dividend cuts.
Meanwhile, retail REITs were not spared either as the circuit breaker restrictions led to a plunge in shopper footfall, causing tenants to report plummeting sales.
As a wide range of industries were hammered by the pandemic, REIT managers were forced to dole out rental reliefs.
Fortunately, the pandemic situation here has improved enough for the country to enter Phase III of its reopening..
Adding to the cheer is the promise that COVID-19 vaccines will be available to all Singaporeans by the end of this year.
As the outlook brightens, businesses should see an easing of the challenging conditions they faced last year.
Because of this, banks, consumer companies and beaten-down sectors could see a swift recovery.
Value could be found in a variety of laggards on the local stock market, even though the recovery may be uneven.
Structural changes may persist
In contrast, over in the US, a wave of digital acceleration has led to the NASDAQ Composite Index (INDEXNASDAQ: .IXIC) soaring 41% last year.
The S&P 500 (INDEXSP: .INX), a broad-based index that is representative of 500 of the most prominent businesses in the US, chalked up a respectable 16% year on year gain.
The performance is surprising as positive gains were recorded amid record job losses in the US..
The reasons for this unexpected performance seem obvious in hindsight: as numerous people hunkered down in their homes, they turned to technology to conduct online purchases and payments, and communicate with friends and family.
Businesses were also forced to digitalise or face extinction in a world that was drastically different from its pre-pandemic days.
This digital shift resulted in businesses such as Amazon (NASDAQ: AMZN), Apple (NASDAQ: AAPL) and Facebook (NASDAQ: FB) enjoying a higher level of business activity and pushing the technology-heavy NASDAQ index to new all-time highs.
What’s more, in 2021, some of these trends are likely to persist.
The shift to online payments and e-commerce could be a structural change as people may not want to go back to the old ways of conducting business.
And with telecommuting taking centre stage, many brick-and-mortar businesses have also re-tooled their business models to cater to this new practice.
For example, Starbucks (NASDAQ: SBUX) has rolled out curbside pickup to 800 Starbucks outlets in the US and is on track to implement this in 2,000 stores across the country by the end of 2021.
Businesses that latch on to these long-term tailwinds can enjoy enduring catalysts that allow them to sustainably grow their revenue and profits in the years ahead.
Getting into (a good) position
At the Smart Investor, we believe in not just identifying sustainable trends, but also in sticking with great companies over the long-term.
But to do so, you have to first position your investment portfolio for long-term prosperity.
Being sufficiently diversified is one of the key attributes to a successful investment strategy, as it helps you to capture the upside from multiple companies while mitigating the risks of a big blow-up in any single business.
Owning a healthy mix of growth and dividend stocks and spreading out your bets could be your best option.
By deploying your cash into strong and resilient companies, you stand a higher chance of participating in the eventual recovery.
The importance of holding cash
Pick up any book on portfolio management, and chances are it will advise you to always keep some cash handy.
No one knows if the current resurgence in cases may point to a new wave of infections that could threaten to overwhelm governments’ best efforts at containment.
Or if a new, more virulent strain of the coronavirus may surface and wreak further havoc.
Stock markets could plunge once again should these events occur, and having the cash to deploy to attractive opportunities means that you need not fret when faced with a market crash of similar magnitude as last year’s.
Get Smart: You can’t predict, but you can prepare
It’s a fool’s errand to try to predict the short-term gyrations of the stock market.
But while you cannot predict what will happen in the next 12 months, you can certainly prepare for it.
Add strong companies to your portfolio that allow you to sleep well at night.
Ensure your risks are covered and that the downside is manageable, should more trouble break out in the world again.
Above all, position yourself for the eventual recovery as the world gets better at tackling this scourge.
And step boldly forward to grow your portfolio and achieve the financial independence you deserve.
Note: An earlier version of this article appeared in The Business Times.
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Disclaimer: Royston Yang owns shares in Apple, Starbucks and Facebook.