Economy,  Life,  Real Estate,  Stock Market

8 Financial Lessons From 2020

Reading Time: 3 Minutes

Happy New Year everyone and WELCOME BACK!

Hands up if you’re very excited for what 2021 will bring?

Haha, I exited 2020 with a whimper, with a (lonely) jog in the park on NYE followed by watching “Tenet” (confusing) with MrsFrugalSamurai, and get this… going to SLEEP before midnight (exhausting), thereby missing out on the fireworks (disappointing) and also ringing in the New Year with MrsFrugalSamurai (chastising).

D’oh! Getting old in my years.

Anyhow, as much as I love to look ahead, it’s also important to look back on the previous year because well… 2020 had it’s moments didn’t it?

So in no particular order, I thought I’d share some lessons which I’ve picked up in 2020, which might help us move forward.

But before you do, I almost forgot – I had written a similar post back in June (here), it’s well worth a visit if you haven’t seen it.

As for those of you who have, enjoy the list below!

Lesson 1 – What Job Security?

2020 once again reminded us that there is no such thing as job security.

Although this time round, it wasn’t really those higher income jobs impacted (except for say, pilots).

Damn them with their boyish good looks and effervescent charm.

This differs from the last “recession” which I went through, being the GFC – in which mostly higher income and white collar professional jobs went.

Many of us who were fortunate to have roles which allowed working from home arrangements probably saw only a minor discomfort from the impact of COVID-19.

But spare a thought for those who didn’t, and were laid off either temporarily or permanently through absolutely no fault of their own from a scenario which no one could have planned for.

Lesson 2 – Government Playbook Is Written

Although the situation could have been much worse, if governments and central banks around the world didn’t step in with unprecedented stimulus packages.

Here in Oz, we saw two initiatives – being the Jobkeeper and Jobseeker payments, which allowed the economy to function and social cohesion to remain.

The cynical side of me wonders why there was so much politicking pre-COVID about “budget surplus” here in Oz or “reducing the deficit” over in the US… when somehow, billions nay, TRILLIONS of dollars were made to magically appear overnight.

It just goes to show that in government, 99% is just plain old politics and perception.

Which means that in future economic and social crises, as long as you chuck money at a problem, eventually everything should be OK, deficits and budgets be damned.

Lesson 3 – Our Youth Are Rising

I’ve said it once and I’ll say it again, COVID-19 was the moment in our generation, for asset values to rebalance to “normal”.

But the free market no longer has an invisible hand, with the sheer amount of money and financial stimulus pumped into the global economies – it’s no wonder there is a burgeoning wealth gap.

And with growing wealth inequality, you’ll continue to see youth advocates like Greta Thunberg rising to the fore.

Future President Of The United States

Most of us Gen Y’ers or older have no inclination regarding what the Gen Z crowd think or do, much less Gen Alpha.

But the way we look at Baby Boomers and Gen X’ers with their “cushy government pensions”, or “affordable housing” or “low stock prices”… well, that’s our future people.

Lesson 4 – Interest Rates

Much of what’s caused this multi-year run on asset values has been interest rates, or rather the continual reduction of cash rates around the world.

I’ve written about this before, but in investing, many things are a derivative of interest rates.

A company’s value is how much it’s future cashflow is worth in today’s dollars. If a company is able to borrow at lower interest rates to invest – this increases their cashflow. The same goes with repaying their existing debt.

Similarly in real estate, commercial values are a function of the yield of an asset (cap rate) which is affected by the amount of existing borrowing, and hence loan repayments.

In residential real estate, (which us Aussies LURVE), it’s all a game of finance – i.e. how much we can afford to borrow from the bank.

As long as rates stay down, the great Ponzi scheme will continue.

Lesson 5 – Housing, A Protected Species

Oh and speak of housing, we saw just how protected it was during the crazy days of March and April.

The Big 4 banks introduced mortgage deferrals and the government introduced stimulus cheques so we could all have and continue to have a roof over our heads.

Personally, I think this again highlights that housing in Australia is too big to fail, or at least the very last sector to go under.

Have my eye on this one if it ever goes under…

The majority of the assets held by the banks in Australia exists in their domestic loan book.

This means that it is in their interests to see housing values propped up, and for us to continue to borrow money.

And the real estate industry is the largest contributor to employment in Australia, with more than 1.4 million jobs.

Don’t you think it’s in the best interests for government to see a healthy real estate sector too?

It might fail one day, but the chain reaction it will cause… I hope I’m not here to see it.

Lesson 6 – Investing Is About Survival

Similar to what I wrote back in June (here), investing is not about making the most money, it is about surviving the longest.

This is because you want to be able to take advantage of the greatest return of them all…

Compounding.

But compounding only works if you give it enough time to grow.

We saw this year, how important it was to just survive… and come back to fight another day.

There were many of us who bought during the depths of the market in March.

Just as many were those of us who sat out on the sidelines.

It doesn’t matter what course of action you did, because there will always be another market downturn, or bear market, or sudden economic shock to allow us the opportunity to get in.

But spare a thought for those retirees or soon-to-be-retirees, who exited right at the bottom.

Lesson 7 – Cash Is King

Cash buys options, which buys time, which buys freedom.

Enough said.

Okay fiiiine, let me expand – it’s very tempting to go “all in”, on some endeavour or opportunity.

But without a backstop, you are literally beholden to forces outside your control.

Piss off you smug little bastard.

So when something completely unexpected happens, like a job loss, or medical emergency or even one of the greatest buying opportunities in a decade… you can’t do anything.

Prudent cash management means just that, managing your cash.

Lesson 8 – Expectation VS Reality

Although don’t expect the next global pandemic to cause the same large drops and volatility we saw.

Since the shock value isn’t there anymore.

We’ve seen it all before.

What causes the greatest shocks, is something completely out of left field.

I tried to find predictions, forecasts and previews for 2020 from any pundit or market commentator, and couldn’t find a single one who “knew” the outsized impact COVID-19 will have on the world.

This is why the next -30% movement will come from “insert unknown cause here”.

Because it is unknown.

~~~

Hope you enjoyed that post boys and girls!

Y’know reading through that list has made me realize… if only I had this at the beginning of the year!

Hahaha, don’t we all.

So here’s to a BETTER 2021 for us all.

Come on, let’s make this year our best yet!

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