MAKE NO MISTAKE, it’s been an extraordinary year for the global financial markets. Nobody could have foreseen all that’s happened, including the coronavirus, its economic fallout and the long, turbulent election season. And yet we shouldn’t be surprised by how the financial markets have reacted, because we’ve seen variations on this movie many times before. Here are 10 investment lessons from 2020:
- Market-timing is a fool’s errand. Who’d have thought that the S&P 500
stocks would have plunged 34% over a brief five-week period, only to
turn on a dime and rocket higher? To avoid getting whipsawed by market
swings, we need to think hard about how much risk we can objectively
take and how much we can stomach, use that to guide our stock allocation,
and then grit our teeth and hang on for the long term.
- Markets are driven by news—which, by definition, isn’t known ahead of
time. No, there weren’t any market pundits predicting a global pandemic
for 2020. Next year, there will likely be some new scare that roils the
markets. The pundits probably won’t predict that one, either.
- Day to day, all kinds of things nudge share prices higher or lower. But over
the long haul, what investors care about most is future corporate profits.
Stocks plunged in early 2020 because investors feared company earnings
would collapse. Why did share prices abruptly recover? The government
made it clear it was pulling out all the stops to avert a deep recession.
- Valuations may give us some insight into the stock market’s likely long-run return, but
they’re useless as a guide to short-term results. Exhibit A: This year’s startling stock
market rally has occurred despite nosebleed valuations.
- Nobody can make investors react like the Federal Reserve. On March 23, the Fed
announced it was “committed to using its full range of tools to support households,
businesses, and the U.S. economy overall in this challenging time.” That was the day the
S&P 500 hit bottom, before surging 17.6% over the next three trading sessions.
- Take all economic forecasts with a grain of salt. In May, Goldman Sachs economists
predicted that the unemployment rate might hit 25%. The worst it got was 14.7% and it’s
now at 6.9%. Meanwhile, in June, the Federal Reserve projected that the economy would
contract 6.5% in 2020. By September, it had revised that to 3.7%.
- Investors collectively don’t much care who wins elections. See point No. 3.
- Just because a stock is apparently overpriced doesn’t mean it won’t become even more
so. Ditto for stocks that are apparently dirt-cheap. For proof, look no further than this
year’s gains by highflying growth stocks—and the continued struggles of long-suffering
value stocks. Will this reverse in 2021? It’s anybody’s guess, which is why we diversify.
- If you own cash investments, like money market funds and savings accounts, you’re all but guaranteed to lose money after inflation and taxes. Indeed, the Federal Reserve, which controls short-term interest rates, will happily sacrifice your return for the good of the greater economy, as it did once again in 2020.
- The economy may be briefly knocked off stride, but the hunger for economic progress
always prevails. Think about how the world has adapted to COVID-19. Yes, there have
been many missteps. But thanks to human perseverance and ingenuity, we’re getting