Investing Lessons Learned from 2020
2020 will be a year we will never forget. From a global pandemic and civil unrest to an economic downfall that we continue to battle through today, it has been a challenging year that has impacted millions of individuals around the world. For investors, as we reflect on the past year, it’s critical we revisit some lessons learned to better ourselves moving forward. While it is unlikely that we will ever experience a year like 2020 again, many of the principles outlined below are timeless, and can serve as foundational reminders that are applicable every year.
- Having an investment philosophy that you can stick with is paramount
- An investment philosophy serves as a “north star”, a compass to guide you through turbulent times. When you have a compass heading or “north star” in focus, it does not take drastic directional changes to find your way. Small adjustments are all you need to stay “on course.”
- While there is no silver bullet in investing or financial planning, understanding how markets work and understanding diversification are good starting points. By adhering to a well-thought-out investment plan, that is globally diversified and based on the individual’s unique goals and objectives, during the inevitable periods of volatility, investors may be better able to remain calm during periods of short-term uncertainty.
- Create an investment plan that aligns with your risk tolerance
- Our experience in working with clients and talking to investors is that (unfortunately) the risk appetite often changes based on the market environment we are in. In early March when we experienced the fastest bear market in history, some would have slept better at night knowing they had allocated more to bonds or cash. In April, when the market had its best monthly return since 1987, those same investors would have felt better knowing they were allocated more to stocks. Point being, you want to have a plan in place that gives you peace of mind regardless of the market conditions.
- Over time, capital markets have rewarded investors who have taken a long-term perspective and remained disciplined in the face of short-term noise. By “long-term”, we mean at least a minimum 5-7 years and practically speaking, a lifetime. By focusing on the aspects within their control (like having an appropriate asset allocation, diversification, and managing spending and taxes) and sticking to a long-term plan that is in line with their risk tolerance, investors may be better able to look past short-term noise and focus on investing in a way that will help meet long-term goals.
- Do not try and time the market
- The 2020 market downturn offers an example of how the cycle of fear and greed can drive an investor’s reactive decisions. Back in March, there was widespread agreement that COVID-19 would have a negative impact on the economy, but to what extent? Who would have guessed we would have experienced the fastest bear market in history in which it took just 16 trading days for the S&P 500 to close down 20% from a peak only to be followed by the best 50-day rally in history? These events were not in any “forecast” or “predictions” that we read. Remember it is “time in the market” not “market timing” that dictates long term investment results.
- Thinking of market timing, trying to time the market based on an article from this morning’s newspaper, a web posting or a segment from financial television is not an appropriate strategy. It’s likely that the information is already reflected in prices by the time an investor can react to it. For investors trying to time the market the odds are stacked against you. The good news is, you do not need to be able to time markets to have a positive investment experience.
- Stay disciplined through market highs and lows
- Financial downturns are unpleasant for all investors. When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility. History has shown that the longer an investor stays with stocks, the better the chances of a positive return. Long term investors should adopt the Warren Buffet philosophy of being greedy when others are fearful and fearful when others are greedy.
- Look beyond the headlines
- Read the newspaper and/or listen to the news to be an informed citizen, not for advice on how to navigate the financial markets. Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. When headlines unsettle you, consider the source and maintain a long-term perspective – growing wealth has no shortcuts.
- Focus on what you can control
- To have a better investment experience, people should focus on the things they can control. For our clients it starts with an investment and financial plan, an understanding of where our client’s cash comes from and where it goes and working with the client to consider future cash flow needs. We tailor the planning in these areas to a client’s specific needs and goals. Along the way, we help clients focus on actions that add investment value, such as updating their planning as goals change, to encourage clients to save as much as they can for as long as they can, to develop strategies to save on income taxes and to review various financial products, if any, they own. Most importantly, a primary service we provide for our clients is to provide knowledge and encouragement to help clients stay disciplined through various market conditions.
We welcome the opportunity to talk with you about your current portfolio, investments and/or financial plan – we are happy to provide a no cost second opinion to you. Please contact us if we can be of assistance to you and your family.