3 investing lessons from 2020 to help investors make better returns in 2021

While some private investors had an amazing 2020, many had a less happy time. But it’s in difficult times that you tend to learn the most. These are the investing lessons from 2020 that I’ll remember. 

First, it’s worth saying that better times could be ahead. There’s increasing hope of the vaccine rollout leading to fewer restrictions by the second half of 2021. So there could be plenty of recovery potential in the stock market this year. But it’s still worth trying to extract lessons from 2020, which was, without doubt, a challenging year. 

Lesson from 2020 #1 – Be prepared to adapt

One of the big lessons for me was to adapt my investing style. Before March 2020 I was an income investor, heavily focused on a Buffett-style value approach to investing. The theory was dividends would compound and could be reinvested in buying more shares. As dividends were suspended in response to Covid, this strategy no longer stacked up – at least in the short term.

It highlighted the need to adapt in strange, testing circumstances. Being stubborn and holding on to a strategy that isn’t working is good for the ego, but bad for profits. I included (for the first time in many years) growth shares such as Team17 in my portfolio. This certainly helped the portfolio by the end of the year.

Lesson #2 – React quickly or don’t panic!

When markets plunge, as they did back in March, you really only have two good options. Panic quickly and sell, then buy back in as markets recover, or wait it out. Once the market has already plunged, selling is the worst of all worlds. Markets always bounce back eventually.

The UK markets made a good attempt at bouncing back through the second half of 2020 and there were profits to be made for those investors who had cash to buy cheap shares.

Lesson #3 – Always have an emergency fund

The saying goes that ‘cash is king’. Having money not invested in a crisis allows you to buy shares as the market recovers – as I did. The aim of any investor is to buy low and sell high. Having cash to take advantage of special opportunities is a good way to achieve this. If the worst comes to the worst and you lose your job, or circumstances change, especially if all this comes alongside heavy short-term investment losses, cash allows you to stay on your feet.

Conventional wisdom is to have an emergency fund equivalent to six months’ salary. But an individual’s risk appetite will dictate to some extent how much cash they keep. I’d suggest having at least three months set aside. After all, the future is uncertain.

2020 was in many ways a year to forget. On the upside, for investors willing to learn, there were many investing lessons from 2020 too. They could help us all to be more successful investors in 2021.

Andy Ross owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.