2016 wont be forgotten in a hurry and maybe thats a good thing. After all, regardless of experience,there are always lessons for investors to learn (or relearn).
So, with less than threeweeks before we bid farewell,lets look at three thingsthe market has should have taught us this year.
1. Expect the unexpected
Trumps election triumph was unexpected by most. But it wasnt just thisthat shocked investors. Given that markets tend to respond unfavourably to surprises, many assumedindexes would tank following his victory. However, we got the opposite a Trump bump as shares in many companies, particularly those focused on defence or infrastructure, soared.
Whether Trump manages to deliver growth back to the US or not, his tenure will certainly be interesting. The whole episode also underlines that fact thatno one knows for sure how markets will behave tomorrow, next week, next year or even how they will react to certain events.As Clint Eastwood once remarked: If you want a guarantee, buy a toaster.
2.Be diverse
For a reminder of the importance of building a diversified portfolios, look no further than Junes referendum result. Although the FTSE 100 and FTSE 250 both surged following a short, sharp sell-off, some industries, such as airlines, are still struggling to get back on track. Holding one of easyJet, IAG or Ryanair shouldnt have done too much damage to your portfolio. However, owning all three and not much else would be have been disastrous, particularly as these companies also had to contend with air traffic control strikes and terrorist atrocities in popular destinations.
Holding a selection of companies in different markets isnt enough. A truly balanced portfolio should have also have geographical diversification. This means buying shares inbusinesses with huge international exposure, such as consumer goods giant Unileveror pharmaceuticals giantAstrazeneca.
With warnings that GDP growth will fall from 2.1% to just 1.1% next year, now might be the time to check whether your portfolio is too heavily exposed to UK plc.
3. Maximum pessimism can bemaximum opportunity
Our final lesson focuses on becoming comfortable doing the very things thatothers wont. Lets look at two examples from 2016.
Buying shares in big oilers such as Royal Dutch Shell in January would have been a shrewd move. Back then, shares in the 172bn cap dipped to their lowest level in 14 years (1,277p) as Brent Crude fell to $28 a barrel. Fast- forward almost 12 months and the same sharesnow trade almost 75% higher at over 22 each. If youd invested 5,000 in January, youd now be sitting on 8,750. Thats excluding any dividends you may have wisely reinvested along the way. All this before the price of black gold haseven fully recovered.
Shell isnt an anomaly. In December2015, Glencores stockwas trading around 90p after analysts warned it would beworthless if commodity prices remained low and the companys huge debts werent addressed. Today, they change hands for 290p as miners continue to benefit from the impact wrought on currencies following 2016s seismic political events.
True,not every share that sinks will automatically rise in time. As always, its vital to thoroughlyresearch companies and only invest if youre convinced that the investment case remains viable. Nevertheless, 2016 has reminded us that being greedy when others are fearful can be a very profitable strategy.
2016 may have been tough but learningthe identity ofyour greatestadversary can be even more difficult. It’s not other private investors, day traders or the big institutions. Rather, it’s likely to be the very person staring back at you in the mirror.
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Paul Summers owns shares in easyJet. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended AstraZeneca and Royal Dutch Shell B. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.