2020 was a year of true unknowns. Rather than dwell on what-was, investors should use the new knowns for guidance in 2021.
Since the Covid lows back in March, stockmarkets rallied strongly – global equities rebounded more than 50% with the US market rising over 60%. UK property has posted gains with prices reaching record highs. Given all the uncertainty, a natural question is why?
“Tina” goes a long way to explain why … There Is No Alternative (not Tina Turner!)
As mentioned here previously, investors around the world (institutions and individuals) are sitting on record cash balances which are failing to provide returns. Historically, during times of uncertainty, cash was a viable safe haven. Now it earns next to nothing. The next safest alternative, government bonds, used to earn a decent premium over cash but the current 10-year UK Gilt yields approx 0.2%. For extra yield (and extra risk), investors might have considered corporate bonds but they barely yield 3% these days, depending on the credit quality [see historical yield charts below].
So the global search for returns makes equities and property an obvious choice, i.e. Tina. The key to all of this is interest rates – Tina is less relevant if/when rates rise. In my view that is a long way away.
So I expect low rates and liquidity to continue supporting equities and property next year. Inevitably there will be dips along the way but that happens every year. Of course there are always bigger risks and three possible (known) risks for 2021 are: #1 a failure by vaccines to deal with Covid (or its variants) in time #2 a significant pick-up in inflation that threatens the low-rate environment and #3 a stockmarket bubble bursting due to over-valuation. #1 is a known unkown, #2 has low probability in my view but would be a very negative scenario, #3 is a possibility but high valuation is never a sole reason for a sell-off.
Compounding. For long-term investors (my own time horizon is indefinite) you may decide not to worry about such trivialities because compounding will be your friend. Here’s a simple but powerful article on compounding i came across recently. An excerpt from the article: “Once you accept that compounding is where the magic happens, and realize how critical time is to compounding, the most important question to answer as an investor is not, “How can I earn the highest returns?” It’s, “What are the best returns I can sustain for the longest period of time?”
Secured Loans. In 2020 the focus was on the quality of loans over quantity – with all opportunities become fully funded very quickly. Finding a good flow of quality deals is a challenge but I’ve been working to solve this problem. The good news is that in 2021 I expect to bring many more opportunities with the same level of DD as before.
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