“The only thing new in the world is the history you do not know.” – Harry S. Truman
2020. If nothing else, I believe 2020 has firmly reinforced the principles that I am constantly communicating with clients: ignore current events, economic forecasts and inane predictions while staying laser-focused on reaching the goals you set in your financial plan. I believe that you’ll be a better investor, and this should give yourself the best chance of reaching those goals. That’s because you’ll be less likely to “misbehave” by allowing emotions to influence your investment decisions. Covid-19 might have been Heaven’s gift to this philosophy.
Before getting further into the lessons of 2020, let me acknowledge and respect the uncertainty that remains with us and ahead of us. This uncertainty most certainly could cause markets to gyrate in unpleasant ways in the next few months. I am under no illusions about this. Covid-19 remains very much with us along with much of the economic dislocation caused by the resulting lockdowns. We are evidently closing in rapidly on a vaccine – indeed, a number of vaccines! While this is welcome news, it could be some time before most of us can receive the vaccine – and it remains to be seen if the public will embrace the vaccine. In the meantime, we will have to go through a bitter partisan election amid new mail-in voting procedures that could delay the results and cause, well, a storm of sorts. It’s a reasonable bet that the social unrest continues – or deepens, depending on the election results.
Setting these uncertainties aside for a moment, let’s review what we as investors should have learned – or relearned – since the onset of the great market panic that began in February of this year and ended when the S&P 500 regained its pre-crisis high in mid-August. The lessons, it seems to me, are as follows:
- The overarching lesson of this year’s swift decline and rapid recovery is, of course, that markets cannot be timed. The long-term, goal-focused equity investor – with investments matched to future goals – is generally best advised simply to ride it out.
- Reading annual economic forecasts is mostly a waste of time. No amount of study can prepare us for dramatic, “black swan” events, which come at us from deep left field. Thus, planning investment strategy based on “expert” prognostication – much less lurid financial journalism – sets up investors to fail. Instead, investors should focus on having a long-term financial plan, and working that plan through all the fears (and fads) of an investing lifetime. This tends to keep us on the straight and narrow by helping us separate our emotions from our investment decisions.
- The S&P 500 dropped 20% (a bear market) in a mere 16 trading days this year – apparently a record. It ultimately bottomed in 23 trading days at a 34% loss. No doubt, there was sheer panic in markets. However, the percentage drop was right in line with the average bear market since WW II. The S&P 500 drops about 1/3 every 5 years or so. With that in mind, it’s best to plan on such unpleasantness so that it’s not a surprise in the future. The lesson is that the declines in the past have not persisted, and long-term progress has always reasserted itself thereby rewarding investors who didn’t panic and sell out of their investments. Is there any good reason this will be different?
- Almost as suddenly as the market bottomed, it completely recovered, surmounting its February 19th all-time high on August 18th. Please note that the news concerning the virus and the economy continued to be dreadful on August 18th as the market reached new highs. There are two interesting points here. First, the speed and trajectory of a major market recovery very often mirror the violence and depth of the preceding decline. Second, the equity market most often resumes its advance, and may even go into new high ground, well before the economic picture clears. Markets are always forward looking.
These are the investment policies you and I have been following all along. If anything – and despite the pain and uncertainty – our experience this year has validated this approach yet again.
The Election. And now, reluctantly, a few words about the election. Undoubtedly, our political culture has turned toxic in ways that are hard to comprehend. It’s completely understandable if you’re feeling anxious given the extreme political bickering and social unrest amid a global pandemic. These are strange times, indeed. But please know that, at least historically, mixing investment decisions with politics has been awful way to approach investing. History shows that neither political party is necessarily good or bad for investors. And each side loves to “horribilize” things in an election year (thank you, Urban Dictionary for making this a word). You know the line: “This is the most important election of our lifetime/generation!!”, etc. Well, maybe this one is – it’s hard to say. I am well-aware that there are some ideas being discussed today that were considered fringe ideas just four short years ago. But politicians running for election and their advocates are notorious for bluster. Please remember that if your candidate doesn’t win, then a mid-term election will arrive in just two short years. As long as that doesn’t change, then politicians tend to govern towards the middle if they want their party to hold on to power.
From my perspective, both presidential candidates carry considerable risk to your investments. Trump could begin wielding the blunt tool of tariffs again while not being constrained by re-election, and Biden could raise taxes and increase regulation in an economically weak environment. And this is just the beginning for both men and their ideas – I can horribilize, too! 🙂 There is no perfect candidate, and I would caution you against allowing your political interpretations and assumptions to get the best of you. Highly-skilled management teams at companies will figure out a way to work within the environment of either candidate’s policies. Please keep my comments strictly limited to the impact on your investments – I take no position in this missive on other issues that oftentimes are important to voters.
A few more thoughts to keep in mind: as to your personal feelings for the President, the market doesn’t care. Policy coming out of the Federal Reserve probably matters more. And it’s best to ignore most predictions: they tend to be wrong…a lot! For example, a Trump win in 2016 was thought to be good for energy and financials due to deregulatory policies. Yet those have been two of the worst-performing sectors in the S&P 500, especially energy.
In conclusion, I firmly and deeply believe that your hard work, thrift and delayed gratification coupled with sound financial planning will help you stay the course and give you the best opportunity to accumulate considerable wealth while reaching worthy goals. But we must stay that course! Don’t be sidetracked by current events. As always, I am only a phone call away to discuss any issues of concern – it’s in my job description to help you stay the course! These are strange times, but I continue to believe that patient and disciplined investors will be rewarded.
It is a continuing and sincere privilege to serve you and your family. Thank you.