The coronavirus pandemic transformed nearly every part of our lives in 2020, from social interactions to work, travel, education and politics. We watched as schools and churches shut down, major cultural and sporting events were cancelled, and travel was reduced to moving from room to room in our own homes, which, for 42 per cent of Americans, also doubled as the workplace.
The stock market crashed in mid-March, with The Wall Street Journal calling March 16 ‘the day the coronavirus nearly broke the financial markets’. The pandemic quickly exposed investment risks associated with industries that had previously seemed too big to fail – airlines, department stores and hospitality – with industry strongholds such as McDonalds and American Airlines facing dire predictions of mass-layoffs and cash runway problems from analysts. It was clear the world had changed, and the way investors viewed and interacted with the market would, too. After all, why would an investor choose to own stock in an industry with documented failure?
Market commentators are increasingly suggesting a move away from the traditional model of diversified investments across a range of industries. While the traditional diversification model still has its place, experts recommend investors shift their focus to sectors that have done well in 2020, such as technology, e-commerce retailers like Amazon and Target, who enjoyed stock price increases of 73 per cent and 40 per cent respectively, as well as cryptocurrencies.
In September last year, Bank of America released The Great Rebalance, a report highlighting key factors influencing the way investors viewed the markets and their investments, and how they should think about building and maintaining their portfolios in a post-pandemic market. The report called for investors to establish long-term goals, analyze risks and stick to their strategies even when volatility strikes.
According to Forbes, given the generally poor performance of professional fund managers picking stocks, investors should consider adopting a market basket approach to their portfolios. Switching out of S&P 500 exchange-traded funds (ETFs) and into Nasdaq 100, could be one way to achieve this. The Nasdaq 100 has a concentration of companies representing the best performing industries – technology, consumer services and healthcare – which has allowed it to outperform the S&P 500 by a wide margin since 2007.
Gold has been the go-to safe-haven asset and ideal hedge against stock volatility for hundreds of years. It is valuable, scarce, and has almost no correlation with assets like stocks and bonds. New kid on the block, Bitcoin, just over a decade old, shares many of gold’s properties, including liquidity, rarity and baseline value, but also has the significant advantages of being easily transportable and transferable, as well as very appealing to the new generation of digitally-based investors . With a market capitalization of over $700bn, and a parabolic price increase since October 2020, Bitcoin is catching the attention of individual and professional investors, who are increasingly including them to diversify their portfolios. Cryptocurrency’s popularity is not just based on a hunch either, with research declaring them as different from traditional financial and economic assets, and uncorrelated with stocks during a market crash. Having said that, the extreme volatility of Bitcoin and other crypto currencies make this asset class not for the faint of heart.
The post-pandemic investment landscape
There were some surprise winners and losers to come out of 2020, with major sectors like the airline industry and brick and mortar retail, hit hard. As more of us stayed home, and online interactions, shopping and payments became the new normal, companies insulated from, or able to capitalize on the effects of the pandemic have flourished.
The performance gap between the S&P 500 and the Nasdaq 100 has widened in the last decade, due to rapid growth in the technology sector and the Nasdaq 100’s weighting towards the more pandemic-proof industries of technology, biotech and healthcare.
In 2020, the Nasdaq 100 saw a gain of 16.9 per cent in the first half of the year, as compared with the S&P 500’s loss of 3.1 per cent, making it an obvious choice for investors seeking to minimize their exposure to those indexes that fell prey to the pandemic. Similarly, cryptocurrency prices surpassed the performance of the S&P 500 and gold futures over the course of 2020, making these a serious consideration for professional and individual portfolios.
All of these developments, along with the rapid rise of niche ETF’s and the democratization of investing, leads to the conclusion that traditional diversification of portfolios will be replaced by a more nimble, focused diversification as the most agile investors seek to navigate the stock market as we move past the pandemic. New investment products are being created daily, and investors have access to tremendous amounts of information in real time. Investors can be choosy and can find products that are almost customized to their taste. This is truly a fascinating time to be an educated and agile investor.