Incredibly, amidst the most severe pandemic of our generation, a continental football tournament complete with thousands of baying spectators could still take place. And took place it did, with teams playing with the same audacity and swagger as the tournament organisers who pulled this off. England was on home soil and had a chip on their shoulder, having not won a major trophy since 1966. Italy was seeking redemption following their lowest point of failing to qualify for World Cup 2018. In the end, it was Italian captain Giorgio Chiellini who lifted the European Championship trophy after a gripping penalty shootout victory over England.
Does football teach us anything about investing? Maybe, but first, let’s see what’s been happening in the financial markets.
Equity benchmarks like the S&P 500 continued to soar in the first half of 2021 as the economy continued its reopening and was still setting record highs this week. In fact, the index chalked up five consecutive months of gains and finished the first half of 2021 with a total return of 15.2%. Historic Covid-19 stimulus and relief measures since last year had been the tailwind fuelling this run. Last month, the Fed hinted at an earlier than expected tapering of bond purchases and signalled two rate hikes by the end of 2023, but even this did not derail the advance for long.
Energy, Financials, and Real Estate were the top-performing sectors in 1H 2021. Last year, they were the worst-performing sectors, but are now benefitting from easing Covid related movement restrictions as vaccination picked up paced and activity levels rebounded. However, the delta variant of Covid-19 could just as quickly put the brakes on the corporate earnings recovery we saw in Q2 and dampen investor optimism. And no one really knows how many more variants will come, and how effective the current vaccines will be against them. Inflation rates in the US are currently well above the 2.4% forecast for the year, which might lead to an even sooner reduction of fiscal and monetary stimulus. Who will be the winners and losers through all these ebbs and flows?
This brings me back to football and Euro 2020. Let me draw out three parallels with investing.
1. Don’t put all your eggs in one basket. Portugal were the defending champions and had Cristiano Ronaldo. France were the tournament favourites and had Kylian Mbappe. Both teams ultimately failed to live up to expectations and fell in the round of 16. Italy in contrast did not depend on any star player but had a blend of different players who each carried out their role so that the team is greater than the sum of its parts. The same applies when it comes to investing. Banging your hopes on a particular country or sector (no matter how good they may look at that time) increases the risk and volatility of your investment. Instead, you should invest in broadly diversified portfolios, where the components work together to consistently deliver a good team performance.
2. Don’t try to outguess the market. Football is a beautiful game, but there’s nothing pretty about a penalty shootout that is ridden with randomness, as Rashford, Sancho and Saka found out to England’s detriment. Trying to guess the outcome is basically a roulette. Investing should also not be left to guesswork. Many active fund managers think they can pick the right stocks at the right time, essentially trying to spot mispriced assets and reap higher returns from them. However, research has shown that over the past 20 years, only 19% of US equity mutual funds and 11% of fixed income funds have survived and outperformed their benchmarks. Gianluigi Donnarumma probably had better odds than that against England! You are better off adopting a strategy aimed at capturing the total market return by investing in broadly diversified portfolios for the long-term, without trying to outguess the twist and turns in the short run.
3. Do have a contingency plan. A scary moment at the Euros was when Christian Eriksen collapsed on the pitch from a cardiac arrest in the group opener. He was Denmark’s best player and would have been an integral part of their team. However, they had a backup plan and showed resilience to make it all the way to the semi-finals before losing to England. Similarly, when it comes to your investment, it is best to do it in the context of a financial plan. The market can be unpredictable, and you should always ensure you have a contingency plan in place so that you can be prepared whenever a curveball comes your way.
Italy were worthy winners, but they could not have done it without their coach Mancini who guided them to playing some of the best football at the Euros. In the same way, don’t underestimate the impact a good financial adviser can have on your investment performance. If you are ready to go beyond investments and assemble a winning combination for your life goals, you should do a Comprehensive Financial Plan (NTUC members enjoy a special discount of 75%). Then not just the game, but life can be beautiful for you as you gain more confidence and assurance about reaching your life goals, no matter what happens. Do speak to your adviser or reach out to us here if you need any advice.