2016 was an interesting year for global stock markets. Brexit and the US presidential election sprung massive surprises, natural resources roared back after years of sliding prices, and the Federal Reserve finally announced an interest rate rise in December that could mark the end of loose fiscal policy.
It was, at times, a rollercoaster ride, but investors who started the year fully invested and stayed that way would have made money. So what lessons can we learn by looking back on the past year?
- Don’t panic – think long term
2016 started horribly, with stock markets falling in the first two months of the year. But anyone who panicked and sold out would have lost out on solid gains over the rest of the year.
Rather than watching stock prices minute by minute, invest for the long term, taking your decisions on the basis of fundamental values and asset allocation rather than knee jerk reactions to financial or political news.
- Event predictions are often wrong
The pollsters couldn’t get anything right in 2016. They said the UK would stay in Europe – the Leave campaign won. They said Clinton couldn’t lose – Trump became president. Investors who tried to play politics would have lost out.
Even trading the market reaction would have led to losses, as while markets fell precipitously for a couple of days after each vote, they rallied strongly from their lows. The lesson from this is quite simple; don’t trade events, unless your name is George Soros.
- Engage with opposing views
‘Fake news’ and ‘the echo chamber’ made the headlines in 2016 (and may have been one reason pollsters got things so badly wrong). Engaging with contrary views, including giving a hearing to media whose political views you don’t agree with and analysts whose view of the markets is the opposite of yours, will help you see the real picture and confront your biases. Come to think of it, engaging with opposing views isn’t a bad life lesson for our everyday relationships with people.
- Look for the contrarian story
Investors who put their money into oil stocks at the start of 2016 made gains of over 40% on the year, while the broader natural resources sector outperformed the market as well. Yet most investors had ignored the sector, putting their money in consumer and technology stocks instead.
Many observers said natural resources would continue to fall, or just tread water. Learn to look for the story that the market’s ignoring – whatever’s out of favour – that’s where you’ll make the best returns.
- You don’t need to time the market
Trying to buy at the very bottom and sell at the very top is crazy. You’ll never get it right – but you don’t need to. Climbing onto a rising market part way up, or taking a small loss on the way down, you’ll still get most of the gains.
Instead of obsessing about tops and bottoms, spend your time analysing the long term trends, and invest accordingly. (All the same, perhaps choose a platform like CMC Markets that lets you trade quickly when you really do need to.)
- Playing it safe doesn’t always work
What’s described as ‘safe’ rarely is. ‘Safe’ defensive stocks led in early 2016, but in the second half of the year they started to track downwards. Why? So many investors had fled to ‘safety’ that defensives were overvalued. Learn your lesson; always do your own work, always look at the true value of an investment, and don’t trust what other people say about it.
- Keep a margin of safety
Market volatility should teach us to keep a margin of safety. Don’t trade money you can’t afford to lose, and don’t put all your eggs in one basket.
- Remember you have a life as well as a portfolio
If you’re investing for your children’s college education, but you never have time to play with them, you’re doing something wrong. One big thing we can take away from 2016’s volatile markets is that there are some times you’re just not going to get it right. Don’t obsess about losses made or profits that you missed out on; you have a life, so go and live it.
How about you? What have you learned about your stock investing in 2016?