2020 will go down as a watershed year in investing history. The stock market crash was the first of its kind since the financial crisis of 2008. But there’s more than just that. I think there are at least three basic investing lessons to learn from it to ensure great returns on our FTSE 100 investments.
#1. Don’t just depend on FTSE 100 income stocks
The year has been a big blow to income investors. Some of the most dependable dividend yielders, like the oil stocks BP and Royal Dutch Shell, have had to cut back. While nothing beats a passive income, I think the big lesson for all investors here is that we can’t just depend on dividend stocks to get by.
If instead, we were to hold high-growth FTSE 100 stocks as part of our portfolio as well, we’ll be better placed. We can have an opportunity to sell these stocks, if required, at a profit even if we’ve held on to them for a while, despite a market crash. The capital, if we like, can be reinvested. This is one way to ensure that we have enough liquidity even when one source of cash inflows stops.
#2. Believe in long-term growth stories
Irrespective of where the markets are at, investing in winning companies in winning sectors will hold FTSE 100 investments in good stead. Some of the key growth industries to look out for are clean energy and e-commerce.
I’d expect FTSE 100 stocks like Johnson Matthey and Rightmove to benefit from these trends over time. Importantly, they are already big companies with healthy growth rates. I reckon they’ll only do well in the next few years.
JMAT’s profits have been hurt this year because of the pandemic, but I’m hopeful that it can come back. In fact, going by its earnings ratio at 49 times, I reckon so are other investors. High earnings ratios can sometimes invite caution because they show bubbles, which will eventually burst.
But that’s not always true. Sometimes as investors we do have to trust market wisdom. Like in the case of AstraZeneca, where I have long argued the high price-to-earnings is just the premium that investors are willing to pay for a robust company.
Similarly, Rightmove is poised to gain from the increasingly online nature of marketplaces. Ocado has been a huge gainer as the right company in the right place this year. I’ve myself discovered the joys of online supermarket ordering during the lockdown, though my grocer of choice is Tesco.
In a similar vein, I reckon that real estate buyers and sellers will find their way to RMV in ever greater numbers over time.
#3. Depend on defensives
Last but not the least, the one way to ensure that loss of capital value in a stock market crash is contained is by investing in safe stocks or defensives like consumer staples, utilities, and healthcare stocks. One that I like is the water and sewerage services provider Severn Trent, which also pays a dividend.
