To say this past year has been a strange one would be an understatement. Many would label 2020 as the year they would prefer to forget. However, life’s biggest lessons can come out of challenges, trials and heartache. So let’s take a look at how COVID has affected us from an investing perspective.
1) We’ve been reminded that volatility doesn’t equate to a long-lasting economic recession or depression
The markets dropped by 33% back in the first couple of weeks in March. On March 16, the Dow had its largest point drop ever and second largest drop by percentage. It. Was. Ugly.
But then on March 24 the Dow jumped 2,112 points — the highest point increase in the stock market’s history. Investors were going crazy trying to come to grips with what a global-wide pandemic would do to an otherwise strong economy. Would it cripple it completely? Was the pandemic going to last a couple of days, weeks, months? It didn’t help that the media did their best to seek attention-grabbing headlines. Over the course of the next several months we saw the market return close to all-time highs.
The lesson? When we see market volatility, don’t assume we are heading straight for a long-term economic recession.
2) Those who sold on the drop are the only ones that lost money
It can be really easy to look at your 401(k) when the market takes a sudden plunge and feel discouraged. You might even use the term “loss” when describing your investments. “I lost 10% of my portfolio today” or “I lost x amount of dollars this week”. However, the key word is “lost”. You didn’t lose anything unless you sold while the market is down.
3) Emotionally-based investing is the worst kind of investing
This ties into the last point. Individual investors who do not have a professional guiding them and holding them accountable in their long-term investment strategies are very prone to what we call “emotionally-based investing”. Meaning, you buy when things are going well, and sell when things go bad.
The financial markets are priced by looking at the underlying value of the companies plus a feeling about what the value of those companies will be in the future. So if the consensus is that companies will lose value in the next 6-8 months, that is built into the trading price of the company’s stock today. The markets are efficient. That means an individual investor can’t simply look out the window, see storms rolling in and decide to take cover. The storms are already overhead -- a long time ago. The strategy to buy low and sell high can easily and inadvertently become "buy high and sell low" for the emotion-driven reactive investor.
4) Have a plan
Failing to plan is planning to fail. By developing a plan with a CERTIFIED FINANCIAL PLANNER™ professional who has your best interests at heart, you should be well aware of how market volatility, corrections, or recessions could impact your portfolio, and make adjustments as needed.
For example, a retiree living off his nest egg with a low risk tolerance should probably not be invested heavily in stocks susceptible to market swings. Whereas, a 20 year old college student with an investment time horizon of 40+ years can handle more volatility in aggressive portfolios.
The most important thing is, the ones who are susceptible to market swings need to stay the course when the inevitable downturn in the economy happens. It is inevitable. If you’re climbing a mountain, you will experience setbacks. The most important thing is to rely on your guides, trust your gear, and lean on your training and planning to eventually reach the summit.