To say the past year has been an unusual one would be an understatement. The ongoing COVID-19 pandemic has disrupted virtually every industry across every nation. While things have settled to an extent in 2021, the coming year is still full of uncertainty.
No matter where you were financially before the pandemic, you’ve likely faced some difficulties this past year. With the new year, you may be optimistic about the future, or cautious and on the lookout for further disruptions.
Regardless of where you stand, you’ll want to get a firmer grasp on the unique business landscape of 2021.
Lingering Pandemic Woes
While many businesses have successfully adapted to the “new normal,” concerns over the pandemic linger. Experts predict public debt among G7 nations to increase by $4 trillion in 2021 as governments continue to fight COVID-19. While this is substantially less than last year’s debt increase, it could hinder any hopes of fast recovery.
After such a long period of losses and disruptions, many businesses may be more cautious this year. Companies will likely focus on a slow return to normal instead of quick growth, impacting investors. Outside of a select few stocks, like large tech companies, returns may be underwhelming for most of the year.
Industries that rely on in-person service will continue to struggle in 2021. COVID-19 is still rampant, and it will likely take a while for vaccines to show large-scale efficacy. Businesses that can’t shift to remote service won’t recover as quickly, and some may be unable to survive.
Recovery in Sight
Despite the pandemic’s ongoing economic impact, recovery is on the horizon. Vaccines have started rolling out globally, and many businesses are learning how to stay profitable in this new landscape. As a whole, industries across the world can expect a recovery in 2021, albeit a slow recovery.
A cautious estimate holds that the global economy will grow by 4% this year, with some nations expanding faster. Emerging markets, especially in trade-dependent countries, will likely recover faster, with many already returning to normal. Companies in or reliant on these areas could see impressive growth this year if current trends continue.
The pandemic revealed how many traditional business practices were unreliable in the face of disruption. The positive side of this trend is that unorthodox up-and-comers have seen favorable results and will likely continue to do so. As more people feel comfortable investing as the year goes on, smaller, disruptive companies could show impressive returns.
The Unique Landscape of 2021 and Business Investments: What to Know
2021’s business investment landscape showcases an unusual balance of promise and tension. With these factors in mind, here are seven investment tips for the coming year.
1. Proceed With Caution
It may be tempting to rush into bold, risky investments this year, given growing signs of recovery. If there’s one lesson you should take away from the pandemic, though, it’s to prepare for the unexpected. Uncertainty still abounds, so you should carefully think through all of your investments and be cautious with your spending.
It can be easy to forget how long it takes to truly break even when the economy starts looking positive again. If you went into debt to purchase an asset, like many did last year, getting the purchasing price back isn’t breaking even. You need to receive back all the principal payments you made to pay off the debt, too.
Even if you don’t find yourself in a situation like this, the companies you invest in may. Promising signs don’t always tell the whole story, so recovery could happen slower than expected. This doesn’t mean you shouldn’t take some risks, but temper your expectations and be careful.
2. Minimize Your Tax Liability
Given the ongoing economic uncertainty, you want to ensure your investments are as profitable as possible. One excellent way to do that is to minimize your portfolio’s tax liability. The more tax-efficient your portfolio is, the more you’ll be able to capitalize on your investments.
You can minimize your tax liability by organizing your investments and asset classes into different accounts. Put funds and assets that generate a lot of income or acquire more taxes into tax-deferred accounts. More modest assets can go into a separate, taxable account.
Depending on where you live and invest, the best practices in this area will vary. Different countries and jurisdictions have varying tax laws, but given the pandemic, you can expect things to shift no matter where you are. Keep an eye on developing tax situations and rearrange your portfolio to remain as tax-efficient as possible.
3. Focus on Long-Term Potential
As economies pick up speed, some potential investments will show considerable growth, but be cautious about these.
While it’s tempting to look for quick income to recover from the pandemic, it’s better to think about the long term. Flashy, high-reward investments are often equally risky, and there’s still too much uncertainty to invest much in these.
Some trends that skyrocketed at the height of the pandemic may not sustain long-term growth. Take delivery apps, for example, which, despite doubling their business last year, remain largely unprofitable and have limited room to grow. These might’ve given investors short-term boosts, but their profits are low or nonexistent, and their use might fall after the pandemic.
Other rising markets amid the pandemic, like cloud vendors, will continue to grow after COVID-19 fades. Digital services can continue to add value to companies in the post-pandemic world, so they’ll reap more long-term rewards. These are also less urgent, so they’ll likely grow more slowly, but they’ll grow longer, representing a better investment.
4. Design and Implement an Investment Schedule
Given the lingering uncertainty in markets this year, you may be tentative to invest too much. While you should be careful with your investments, starting now can help you learn the markets and develop smart habits. You may find it helpful to make an investment schedule to encourage and guide you through this uncertainty.
Investing a certain amount every month or every quarter forces you to pay attention to markets. As you follow this schedule, you’ll develop confidence as you see returns every period. You’ll see losses, too, but since you won’t invest too much at once, these won’t be substantial and can teach you patience.
Investing on a schedule will also help you stick to a budget. If you stick to a pre-defined schedule, you won’t spend too much at once, which would be risky in the current environment.
5. Consider Automating Your Investments
You may find it challenging to invest according to a schedule, either out of fear of loss or not knowing what to do. If that’s the case, you can turn to some form of automated investments for help. Automated actions help remove some of the emotion from investing, helping you manage risk and reward in this confusing year.
An excellent example of automated investments is automatic enrollment in 401(k)s or other retirement plans. Automatic enrollment takes money out of every paycheck and places it in your retirement fund. You can go a step further by electing for automatic escalation, which increases your investment amount over time.
You can apply these concepts to other types of investments, too. Talk with your brokerage to see if you can set up automatic investments in a given field, asset class, or fund. If you budget carefully beforehand, you can also choose to increase these investments automatically according to your schedule.
6. Look Internationally
In the past, U.S. stocks have been the go-to investments for investors around the world. This year, non-U.S. stocks may outperform them, thanks to faster recoveries in other nations. China, for example, was the only trillion-dollar economy to grow in 2020 and will likely overtake the U.S. as the world’s largest economy before long.
None of this is to say you shouldn’t invest in U.S. companies, but consider diversifying your portfolio with stocks from other nations. Stocks in other, faster-growing countries will likely show stronger growth this year, bolstering your finances. They could provide short-term gains as these nations recover faster and offer long-term stability in the increasingly global market.
As with all investments, you should remember to diversify here. Don’t put all of your money in stocks from one nation, just as you wouldn’t solely invest in one company.
7. Prepare for Inflation
The measures governments took to help their citizens amid COVID-19 will likely lead to inflation. Even if you don’t live in a country that will see significant inflation, you probably have stocks in one that will. Keep an eye on these trends so you can respond accordingly.
Fixed-income investments, which typically provide security, will become less profitable within the year amid inflation. In contrast, nontraditional asset classes tend to perform better in these same situations. You may want to prepare for incoming inflation by favoring these stocks in the coming months.
Remember, as with everything, not to over-adjust. You don’t need to abandon fixed-income investments in their entirety. Markets and global economies still face high uncertainty, so you can act on these trends, but slowly and carefully.
2021 Can Be a Year of Growth
2020 was a challenging year for many entrepreneurs and investors, and 2021 will likewise bring some unique considerations. If you follow these steps, though, you can turn some of these changes to your advantage.
With careful consideration and planning, you can experience some much-needed growth in 2021. Many things remain uncertain, but that doesn’t have to stop you from investing this year.