As we turn the page on 2020, there are countless takeaways and lessons to be learned. We hope for better days ahead as 2020 was a challenging one for all. But before moving forward, we need to reflect on what transpired. When it comes to the markets and investing, I believe 2020 provided us with more lessons than the past decade. The important thing is we learn from these experiences and use them to our advantage moving forward.
Volatility
While it feels like a lifetime ago, the level of volatility in February and March still seems surreal. As the COVID-19 pandemic unfolded, the decline in equity markets was somewhat expected, but the sharp decline in the bond market was not normal and was scary at times.
It is extremely rare for bonds to experience double-digit declines in a calendar year. It’s so rare, in fact, it has happened only once in the last 40 years! Yet, in 2020, in the span of 30 days, several bonds indices plunged 10% to 20% with daily swings of 3%!
This speaks to the uncertainty and fragility of markets at the time. Thankfully, by late March, bonds started to recover and haven’t looked back since. Unsurprisingly, this recovery coincided when the Federal Reserve stepped in with the promise of unlimited stimulus.
Much of the same can be said for equities, albeit with a few extra blips of volatility along the way.
What does this tell us? Well, for one, markets tend to recover when things look their bleakest. A closer look at the unemployment rate helps paint the picture. As the unemployment rate was accelerating in both 2009 and 2020, markets were on the verge of monumental rallies.
Death of Buy-and-Hold?
Over the years, I’ve read countless articles about the death of the “buy and hold” strategy. But not only is it still alive, it’s thriving. To be clear, implementing certain tactical decisions can be beneficial, but sometimes the best strategy (also the hardest) is to make only minor changes.
To put matters in perspective, let’s take a look at the historical record:
Dating back to 1928, a 60% equity and 40% bond portfolio has earned ~7.7% per year.
The same 60/40 has averaged ~10.7% per year since 1970.
Over 20 years, from 1993 to 2013, the 60/40 portfolio earned ~8%/year, while studies showed that the average investor earned only ~2.5%/year.
Most investors would take these risk-adjusted returns, yet the average investor continually falls short. This tells us that far too many investors attempt to time markets—with consistently unsuccessful results. While it can be hard watching your portfolio fluctuate, it is almost universally advisable to stay the course and adjust your portfolio based on your true risk and not your emotions.
Headlines and Emotions
As I mentioned in another market commentary, investors react to headlines far too often. While it’s hard to ignore them, especially during a pandemic, it’s your best bet. Information travels so rapidly that by the time it’s a headline story, it’s often too late to act. Even the “best and the brightest” are often wrong, so assuming the headlines will give you a leg up is wishful thinking.
Did I expect the sort of market bounce back we have seen? No. But I have learned that short-term expectations are merely blind guesswork. To be fair, 2020 felt a bit different as we were battling a global health pandemic—but you can always depend on something else coming along, and when it does, it will be important to reflect back on what we learned from 2020.
Here’s to hoping 2021 brings much brighter days ahead!
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