Lessons of 2020

market insights wyatt moerdyk Jan 21, 2021

Once in a very great while, there comes a year in the economy and the markets that may serve as a tutorial—in effect, a master class in the principles of successful long-term, goal-focused investing. Two thousand twenty was just such a year.

On December 31, 2019, the Standard & Poor's 500-Stock index closed at 3,230.78. This past New Year's Eve, it closed at 3,756.07, some 16.2% higher. With reinvested dividends, the total return of the S&P 500 was about 18.4%.

From these bare facts, you might infer that the equity market had, in 2020, quite a good year. As indeed it did. What should be so phenomenally instructive to the long-term investor is how it got there.

From a new all-time high on February 19, the market reacted to the onset of the greatest public health crisis in a century by going down roughly a third (-33.61%) in five weeks. The Federal Reserve and Congress responded with massive intervention, the economy learned to work around the lockdowns—and the result was that the S&P 500 regained its February high by mid-August!

The lifetime lesson here: At their most dramatic turning points, the economy cannot be forecast, and the market cannot be timed. Instead, having a long-term plan and sticking to it—acting as opposed to reacting, which is your and my investment policy in a nutshell—once again demonstrated its enduring value.

The American economy—and its leading companies—continued to demonstrate their fundamental resilience through the balance of the year, such that all three major stock indexes made multiple new highs. Even cash dividends appear on track to exceed those paid in 2019, which was the previous record year.

Meanwhile, at least two vaccines were developed and approved in record time and were going into distribution as the year ended. There seems to be good hope that the most vulnerable segments of the population could get the vaccines by spring, and that everyone who wants to be vaccinated can do so by the end of the year, if not sooner.

The second great lifetime lesson of this hugely educational year had to do with the presidential election cycle. To say that it was the most hyper-partisan in living memory would not adequately express it: adherents to both candidates were genuinely convinced that the other would, if elected/re-elected, precipitate the end of American democracy. 

In the event, everyone who exited the market in anticipation of the election got thoroughly (and almost immediately) skunked. The enduring historical lesson: never get your politics mixed up with your investment policy.

Still, as we look ahead to 2021, there remains far more than enough uncertainty to go around. Is it possible that the economic recovery—and that of corporate earnings—have been largely discounted in soaring stock prices, particularly those of the largest growth companies? If so, might the coming year be a lackluster or even a somewhat declining year for the stock market?

Yes, of course, it is possible. Now, how do you and I—as long-term, goal-focused investors—make investment policy out of that possibility? My answer: we don't, because one can't. Our strategy, as 2021 dawns, is entirely driven by the same steadfast principles as it was a year ago—and will be a year from now—by focusing on what we can control.

  • Create an investment plan to fit your needs and risk tolerance.
  • Structure a portfolio along the dimensions of expected returns.
  • Diversify globally.
  • Manage expenses, turnover, and taxes.
  • Stay disciplined through market dips and swings.

Therefore, we tune out “volatility.” We act; we do not react. This was the most effective approach to the dramatic fluctuations of 2020. I believe it always will be.

Finally, all political and investment lessons aside, 2020 forcefully upended our active pre-pandemic lives, and in a startling way brought what really matters to each of us into focus. The importance of family, time with loved ones, fellowship with friends, and good health all come to mind. 

So, here is to a healthy and prosperous 2021! I look forward to our discussions and review sessions later this year.  Until then, let me thank you again for being my client. It is a privilege to serve you.

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