Begin the new year with some reflection on investing. Think about what you learned from last year and consider setting New Year’s financial resolutions based on your values. Perhaps you want to invest based on a longer time frame, personal values, or becoming more adventurous.
Revisit your investment plans at the start of the new year
Think about your personal values and identify different investment choices that match those values
The new year may be a good time to try new types of investments, such as options
To say 2020 is a year unlike any other is an understatement.
We’ve all been impacted by the effects of the coronavirus, in big ways and small. When an event as significant as a global pandemic happens, it can be a good time to reflect on and revisit what’s important to us.
That may include reminding ourselves of our personal values, strengthening our relationships with friends and family, and thinking about the long term. For some it could mean becoming more adventurous when it’s feasible.
The same sort of reflection can be applied to investing, too. With a new year coming up, it’s a chance to rebalance holdings, revisit strategies, and think about long-term plans. It may also be a time to consider looking at different types of investments or new ways to align your investments and your core beliefs.
Year-end bookkeeping can be an integral component of the investment approach, so don’t miss a chance to take advantage of tax-loss harvesting, prune positions that may have grown greater than their original sizes, and shore up other allocations. After a volatile market year, certain sectors such as Technology, Communication Services, and Consumer Discretionary saw sharp rebounds, while Financials and Energy have been relatively weak.
And it’s not just sectors that fall in and out of favor. Investing styles—particularly the classic “growth-vs.-value” paradigm—has seen some ebb-and-flow amid COVID-19. The same can be said for market capitalization, with large-caps leading for much of 2020, but small-caps coming on strong in the final months of the year. Which categories might be positioned for strength coming out of the crisis? The year end might be a time to consider changes—while keeping any portfolio moves within the context of your long-term goals.
Michael Kealy, education coach at TD Ameritrade, looked back at market patterns this year and offered a key lesson about missed opportunities, especially buying the dip.
“When the pandemic was first surfacing, it seemed as if fear was so pervasive that very few people were willing mentally, initially, to see it as an opportunity to buy,” Kealy said, noting that some buying interest eventually came back, and many new investors entered the market.
Since then, market indices have bounced back. The lesson, he observed, is to have an investing plan that accommodates “letting you take little nibbles” when there’s a correction.
“You shouldn’t get gung-ho and let emotion take over. But when you see corrections, consider if the situation is possibly presenting a buying opportunity, as that’s been the case time and time again for so many years,” Kealy continued. But what’s happened in the past is not a guarantee that it will continue to happen in the future. Market conditions change constantly.
Environmental, social, and governance factors, known as ESG, already saw strong investor interest pre-COVID-19. Since the pandemic began, investing with a mindset geared toward sustainability has received renewed interest. Recent research from US SIF, a group that tracks sustainable investing, said ESG investing now accounts for one-third of total U.S. assets under management.
Environmental sustainability has been the most popular ESG factor, and one that’s simpler to measure. Major companies like Microsoft (MSFT) made pledges to go carbon negative by 2030. The US SIF report said money managers who use ESG factors in their investment analysis stated climate change is their top concern.
But two other factors suddenly gained attention in 2020, and the pandemic brought social concerns to a boil. Governance issues came into sharper focus as people looked at how companies treated workers when millions were laid off or furloughed. Access to health care amid a health crisis is now a social issue, as is diversity.
According to Morningstar, ESG strategies outperformed in 2020, in part because many of them avoided investments in fossil fuels, which were hit hard as consumer demand for transportation fell during the pandemic and as alternative energy continues to make inroads into traditional energy. The research firm said through the end of October, 73% of sustainable equity funds rank in the top halves of their Morningstar Categories and 25 of 26 ESG-focused index funds outperformed their conventional index-fund counterparts.
Time will tell whether 2020 marked a paradigm shift for ESG investing, or whether it was an anomaly. Such funds are relative newcomers on the investing scene, so if you’re considering an allocation to ESG, make sure to do your homework.
ESG investing can also work into long-term plans, especially for people who are concerned about climate change and its potential impact on future generations. Thinking long term can take you in many different directions, from investing for retirement to opening a 529 plan for educational spending. It may include investing in growth companies or those in the small- to mid-cap categories that benefit from long time horizons.
Kealy noted the new year is also a good time to create or revisit investment plans overall. As you research stocks and other vehicles, consider both entry and exit points, he explained, especially if prices fall. For example, if you bought a stock at $80 and it falls to $40, is it time to revisit your conviction? Have your reasons for owning it changed? Is your outlook for it the same?
The historically quieter times at the end of the year and the beginning of a new one may be a good time to reevaluate your risk appetite. How did you feel when the market fell in the first quarter? It’s normal to feel trepidation, but stress and outright uneasiness may be a sign to research risk-management tools or adjust your asset allocation.
For people who used the market break as a buying opportunity or are new investors, another New Year’s financial resolution may be to learn more about the different types of investment vehicles. Although buying dips may have made sense in hindsight, doing it while the market is actively falling is another. For investors who haven’t tried options, now could be a good time to learn more.
When used strategically, options can help sophisticated investors pursue their objectives in a capital-efficient manner, with defined risks, and can even be used to help protect a portfolio during adverse price movement. But options have unique risks, and they’re not for everybody. If you’re considering options for the first time, make sure you understand how they work before trading them.
The point is, if you’re planning something new for your portfolio in 2021—new allocations, new priorities, or even new products—remember the value of education. Are there gaps in your financial literacy? If you’re a TD Ameritrade client, there’s a wide range of investing education resources to help—webcasts, articles, videos, and even immersive curricula—all freely accessible.
Happy new year.
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