Jeff Prestridge: what lessons can investors take into 2021?

Our columnist argues the case for a broad, diligent approach to investing – and don’t be greedy.

New year, new lockdown. How long before we are able to extract ourselves from this wicked coronavirus – and return to a semblance of normality? Your guess is as good as mine. Gloom currently pervades me like a chill following a blast from the Beast of the East (number three is heading our way).

For investors, the latest lockdown has (thankfully) not caused the stock market to copy the tailspin it went into last spring. Maybe the anticipated mass vaccination programme is the hope that the stock market is clinging on to. Brighter times, it believes, are waiting for us all just over the horizon.

I do hope it’s right and that the government responds by moving heaven and earth in the coming months to get us all vaccinated as soon as possible. I say: away with bureaucracy and in with the army – superb at logistics - and let pharmacists give the jabs too.

With the UK stock market having fallen 15% last year, it’s understandable that many experts believe this is the year when it is finally going to attract international interest and come roaring back - in some considerable style. A Brexit deal has been done. An economic rebound is likely in the second half of the year and major inroads have been made into vaccinating the nation.

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Yet these bounceback predictions are similar to those the same experts made after Boris Johnson’s election success in December 2019 – only for coronavirus to spoil the party in ugly (and tragic) fashion. You just can’t predict the future.

I believe investors should adopt a broad, diligent investment approach this year (as indeed they should in all years). One that utilises all the tax breaks currently available to them – and acknowledges that we now live in a world where exposure to global stock markets is as easy as spreading butter on toast. Exposure that can be built steadily and calmly through monthly investing (the drip, drip approach).

Yes, I know it’s not rocket science, but it’s amazing how many investors don’t get the basics right – and as a result end up paying unnecessary tax on investment gains, investing at the wrong time, and building portfolios either skewed horribly towards one market or dependent on just a handful of shares.

With the country’s finances in a parlous state there is every likelihood that Chancellor Rishi Sunak will at some stage look to rein in spending and raise taxes.

ISA allowances (extremely generous at £20,000 a year), tax relief on pension contributions (especially attractive for higher-rate taxpayers) and capital gains taxes (plus a sizeable annual exemption of £12,300), are all ripe for curtailment.

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And although the current lockdown may force the chancellor to push back the March Budget, there is no doubt that he has these three tax breaks firmly in his sights.

So, take advantage of them while they remain so generous – the Institute of Fiscal Studies believes pensions and the tax regime for capital gains are both ripe for reform.

1. Ensure you maximise your use of the £20,000 ISA allowance for the tax year ending on 5 April, thereby sheltering future wealth (savings and investments) from degenerative tax.
2. Put as much money as you can into your work or personal pension between now and 5 April, subject to the annual allowance limit of £40,000. Indeed, your employer may well respond by putting more into your pension as well.
3. And if you’ve accumulated handsome profits from holdings in shares outside of an ISA or pension, consider crystallising some of the gains by taking advantage of the capital gains tax-free annual allowance.

In terms of investing, don’t be greedy. Of course, technology and China have been rich havens of investment return in 2020. They may well keep on delivering in 2021 as they help (in their different ways) to push the global economy into growth mode. Indeed, the Chinese stock market continues to hit new highs. But be prepared to spread your investment wings a little.

So, for example, think about investing in some of the long-established global funds – both investment funds and London stock market listed investment trusts – that provide exposure to a broad church of shares and markets. The likes of Alliance, F&C Investment Trust (LSE:FCIT), Scottish (all trusts) and JOHCM Global Select Hambros (my fund pick for this year). These are the Steady Eddies of the investment world. A little boring, maybe, especially when compared to the testosterone performance of quasi technology trust Scottish Mortgage (LSE:SMT) in 2020, but providers of attractive long-term returns.

Finally, try and get into a regular investing habit – where you don’t miss the money you invest.

I wish you all a healthy and prosperous 2021