Top Lessons from 2020
2020 will certainly be remembered for many historical events, from COVID to record-setting election costs and voter turnout. In the financial markets, we also had our ups and downs, and are currently on the upside across most markets. As the year ends, it is a good time for us as investors to stop and reflect. What have you learned? What will you do differently?
Here are some of our Top Lessons for 2020 (with links to more descriptive blogs):
Stay Focused on the Bigger Picture
(from "Pointillism: Seeing the Bigger Picture in Today's Markets")
When you focus on small moments, you lose sight of the bigger picture and can become easily overwhelmed. We saw this during the market downturn earlier this year. Many people were focusing on the sudden market decline in March, forgetting that over the past 40 years, we have experienced similar corrections and seen recoveries in reasonably short time periods. Many investors are quick to think any correction they are experiencing is the end of the future economic world!
This lack of historical perspective caused many people to panic and make decisions they later regretted as the market proved to recover (once again). It’s important to take a deep breath, be appropriately allocated, and focus on the longer term.
Figure 1. We use the S&P500 as our "market" definition and have not labeled the axis so that you can focus on the "picture." The blue highlighted area is the March 2020 market correction.
Market Timing is Wasted Time. Stay Invested and Stick It Out.
(from "COVID-19 Market Update: March 12, 2020")
There are numerous studies that show trying to time the market is a fool’s game. It’s been best to have a strategy and stick with it. In a piece from Investor’s Business Daily, the data shows that cashing out puts you at risk of missing the best market days, ultimately resulting in a worse return than you would have experienced staying invested through the bad days. “You’re likely to miss the typically unpredictable starts of each new run-up in the market. Those tend to be among the market’s best days. The price for missing out is that your total returns suffer.”
Figure 2. Source: https://www.investors.com/etfs-and-funds/personal-finance/cashing-out-market-downturn-smart/
Investing successfully takes time and staying in the game. There will be ups and downs across that time. That’s just an inevitable part of the process. Learning to press on during those times and stay in the market so you don’t miss the recovery can make a big difference in your overall returns.
If It's on the News, It's Already Too Late!
(from "Survival Guide: Preparing for and Lasting Through Economic Downturns")
If everyone is talking about it, it is too late to act on it as the share prices will already reflect it. The majority of the time, it’s safe to assume you are not ahead of the game and you cannot beat the market because you have some special insight. The market is just really, really efficient and dominated by PhDs, machines, artificial intelligence, and professionals. Yet, weekend retail investors think they can win. Sometimes luck falls their way. Most of the time it doesn’t.
As stated by Carl Richards in his book, Behavior Gap, “It’s not that we’re dumb. We’re wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great. It may feel right – but it’s not rational.”Rather than trying to beat the market, implement and stick to wise habits. Here are 6 tips we give to survive through a tumultuous market season:
Have an emergency fund in place. Keep 3-6 months of non-discretionary spending in cash to be available in global economic, industry-specific or personal crises.
Prepare a budget (and review it regularly). A budget can give confidence and freedom, enabling you to be more strategic in spending and saving.
Live under your means. Giving yourself margin prepares you for changes in your financial situation or the economy.
Be properly allocated. The amount of risk in your portfolio should be proportionate to your age, financial situation, and comfort level.
Keep your eyes on the right horizon. Again, with a long-term horizon, the market dips really will not seem to matter as much.
Give! It is easy to become “me-centric” in crisis. Charity can be a great antidote to anxiousness when things may not be going as we would prefer.
Economic Forecasts are Full of Folly
In a study of market forecasts from 1998 to 2012, it was found that accuracy across 6,000+ forecasts was 48% - worse than a flip of a coin. Larry Swedroe says there are only three types of forecasters: "those who don’t know where the market is going, those who know they don’t know, and (the most prevalent kind) those who know they don’t know but get paid a lot of money to pretend they do."[1]
When COVID hit earlier this year, nearly every media source was running a headline about the market and when or if it would recover.
On April 3, 2020, a list of forecasts for the end of year S&P 500 was published. Today the market is around 3700. Everyone missed it low. Most by over 25%! Yet, we tend to listen to these banks as if they truly know the future.
MarketWatch led with this headline on April 6, 2020: “Wall Street star money manager says S&P 500 could plunge to 1,500 in the worst case, with coronavirus fallout lingering for years.”[2] The Guggenheim CIO was clearly wrong.
Pessimism sells. The noise of the headlines and seemingly confident forecasters can cause investors to panic.
Again, we encourage you to remember that market forecasts are full of folly. You should keep your long-term perspective and stay invested through the panic.
Politics Don't Impact the Markets as Much as You'd Think
(from "Presidential Election and Your Asset Allocation")
Since 1926, U.S. markets have rewarded investors with attractive long-term returns. It has not always been a straight lineup, but over longer-term, returns have been positive. In fact, only 6 of the 85 10-year periods have had negative returns, and 4 of those were in the 1930s. Looking across Presidents and Political parties, you see a fairly consistent pattern of 4-year positive regardless of who sits in the White House.
Figure 3. Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
This analysis looks at cumulative returns under different party leadership models (e.g. who controls House and Presidency). As you can see, there isn’t much difference in the cumulative returns over those periods. We may think there is – or even hope there to make our political point – but the data tells a different story. (And one that once again reminds us to stay invested.)
Figure 4. Source: https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-returns-and-elections
Even through this dramatic election season, we experienced strong returns in November with the S&P 500 up 10.8% and S&P SmallCap 600 up 18.0%!
It's Always the Right Time to Do Your Estate Planning
(from "Estate Planning During an Economic Downturn")
If 2020 has taught us anything, it is that life is immensely unpredictable! A 2020 study by Caring.com and YouGov found that only 32% of people have an estate document. Study participants cited the following reasons for not having an estate document: “I haven’t gotten around to it”, “I don’t have enough assets to leave anyone”, “It’s too expensive to set up”, and “I don’t know how to get a will or living trust.” Yet, in the same study, 60% of those same participants said that having a will or living trust was “very or somewhat important.”Even in agreement that an estate plan is probably a necessity, many people don’t ever take action on it. But there is no knowing what the future will hold for you – no certain future is promised to you and you ought to prepare.
Here’s a list of some common estate documents to put into place:
Will. This allows for distribution of assets according to your specific wishes and limits legal and family challenges.
Power of Attorney. This allows a trusted person to have the power to handle transactions and make legal decisions on your behalf.
Beneficiary Designations. These can prevent assets from going through the probate process.
Guardianship Designations. Legally indicate who you’d like to be the guardian of your child. Without this, the courts, who do not know your personality and wishes, will make the decision for you.
Medical Directives. These instruct how you’d like to be cared for – if you allow resuscitation, tube feeding, etc.
The good news is most of these documents are templates and free for users. And basic wills can be drafted with many different low-cost online tools. It is just a matter of committing the few hours to complete.
Human Perseverance Prevails!
Many people have accused 2020 as being the worst year ever, and at times, it can certainly feel that way. National Geographic explored the psychology of why we are tempted to believe, every year, that the present year is the worst one yet. Our “nostalgia bias” causes us to forget the negative moments of the past, leading us to believe this year’s bad experiences are the first of their kind. And the inundation of information from the news and social media is, unsurprisingly, increasing this sense of doom. A 2017 study by the American Psychological Association found that people who stayed up to date with the news reported less sleep and more anxiety, fatigue and other mental health symptoms.
And YET, while things seemed gloomy, we humans have prevailed. The world hasn’t ended. And in fact, there is still some wonderfully good news that can be found every day. If you need a break and want to restore some home in humankind, head toward goodnewsnetwork.org, read this article from USA today, or glance through these 13 stories.
Good news can be found! It’s refreshing to the body and soul. Seek it out and have hope. We will get through all of this together.
[1] Accountability Proves the Incompetence of Market Forecasters by Larry Swedroe, 1/6/2020
[2] Market Watch’s “Wall Street Star Money Manager Says S&P 500 Could Plunge to 1,500 in Worst Case, with Coronavirus Fallout Lingering for Years”, 4/6/2020
