Four Lessons Delivered in 2020

Four Lessons Delivered in 2020

Sometimes, it takes years for key investment lessons to play out to the point we get to say, “See? Told you so.”  Not so in 2020. Now that this excruciating year is behind us, we can at last appreciate the remarkable crash course it offered in nearly every principle inherent to successful long-term, goal-focused investing.

Where to begin?  Let’s start with the power of planning.

Lesson #1: Planning beats reacting.

“Short-term thinking repeated again and again doesn’t lead to long-term thinking.” — Seth Godin

You were there, so you probably remember:  Major global stock markets declined from near all-time highs in mid-February to a low on March 23rd (34% in 33 days).

Few of us saw that coming.  Fewer still might have guessed things would so abruptly reverse, to end 2020 with new highs, well into positive territory.  The U.S. stock market reached new heights last summer, even as the pandemic and its economic devastations raged on.  The Canadian stock market reached a new high recently on January 7, 2021.  Europe and other global stock markets still have a way to go.

The lifetime lesson here, and my key, repeated observation for 2020, is simply this:

The economy can’t be forecast, and the market cannot be timed.  Instead, have a long-term plan and stick to it during dramatic turning points.

Planning as opposed to reacting – this is your and my investment policy in a nutshell, once again demonstrating its enduring value.  Consider these points:

Much ado about nothing:  The velocity and trajectory of the equity market recovery nearly mirrored the violence of the February/March decline.  For those who like to relate letters of the alphabet to economic or market performance charts, the 2020 stock market chart was a pretty pronounced V.

Patience is a virtue:  In volatile markets, it’s tempting to “wait for the pullback” once a market recovery is underway, and/or wait for the economic picture to clear before investing.  Either or both formulas are more likely to underperform compared to simply sticking with your disciplined plan.

Lesson #2:  In investing, “shiny and new” often isn’t.

“Modern portfolio management tools give today’s investors control over their own savings, insight into fees and performance, and the luxury of watching their money vanish in real-time when markets plunge.” — Tim Shufelt, The Globe and Mail

The most significant behavioural mistakes investors make (individuals and institutions alike) are panicking in a down market or getting caught up in the allure of a hot market fad.  While both can be severely hazardous to your financial health, my experience is that chasing hot new trends is often the most damaging.

Today’s trends may be new, but the lesson is all too familiar:  A hot new investment trend is wonderful and exciting … until it’s not.

For example, reading today’s financial news, I sometimes wonder if I have been asleep for the past 20 years, like Rip Van Winkel.  Have I just woken up in the tech boom of the late 1990s, when there was more than an average number of hopeful investors trying to score big on the latest tricks of the trade?  If you’ve been around as long as I have, you know that didn’t end well.  A lot of investment portfolios were left woefully deflated once that bubble burst.

From the adventures of day-trading brokerage accounts, to chasing the latest hot IPO, to piling into large technology companies (regardless of their bloated valuations), the similarities between then and now are uncanny.  Today, we could add record-busting bitcoins and blank-check SPACs to the mix.

Then and now, rising markets often tempt the uninitiated to abandon their well-diversified portfolios to chase after the “easy” money.  Then and now, your best move remains the same: stay diversified.  Concentrated bets on hot trends generate wildly unpredictable outcomes, which makes them far closer to being dicey gambles than sturdy investments.

Put another way, if investing were a school, the markets charge a steep tuition to those who don’t heed their history lessons.  I wonder if 2021 could be an expensive year for those chasing the latest hype?

Lesson #3:  Be selective in your media diet.

“Wow. If I’d only followed CNBC’s advice, I’d have a million dollars today … provided I started with $100 million dollars. How do they do it!?” — Jon Stewart, The Daily Show

This is a topic for deeper discussion, but it’s worth including in our 2020 reflections:  Investors should remember that popular and social media is much better at hyping extreme news than offering calmer views.

A case in point is a recent working paper, “Why Is All COVID-19 News Bad News?”  Its source is the non-partisan National Bureau of Economic Research (NBER), whose functions include such exciting endeavours as calculating the “official” beginning and end of U.S. recessions.

The NBER analyzed the positive/negative tone in more than 9.1 million COVID-19 English-language news stories from January 1–July 31, 2020.  They found 91% of the articles published by major U.S. media outlets were negative in tone. In contrast, 65% of pieces published in scientific journals and 54% in “non-U.S. major sources” were negative in tone.

The paper’s authors observed, “U.S. major media readers strongly prefer negative stories about COVID-19, and negative stories in general.  Stories of increasing COVID-19 cases outnumber stories of decreasing cases by a factor of 5.5 even during periods when new cases are declining.”

The lesson here, and the point I’ve made before, is that the popular financial press is focused far more on selling advertising or paid subscriptions than on objectively informing you or making you a better investor.  Moreover, if the mainstream media is so biased, what does that say about social media feeds, where fact-checkers are even fewer and emotions are even higher?

In short and as always, watch out what investment “news” you’re consuming.

Lesson #4:  Politics and investing don’t mix.

“Vote with your ballot, not your life savings.” — David Booth, Dimensional Fund Advisors

My final lesson from 2020 revisits an important point I addressed in my October post, Should I Change My Investments During an Election?” 

Obviously, as Canadians, we are greatly affected by events in the United States, especially its politics.  And to say the least, U.S. politics has been just a teensy bit hyper-polarized these days.

And yet, despite the November 3rd U.S. election, November was one of the best months ever for global stock market returns.  Go figure.  The lesson is twofold.

  1. Market-timing disappoints, again: Any investors who exited the market in advance of the U.S. election rued the day, not to mention the rest of the year.
  2. We still don’t know what we don’t know: Even more importantly, whether it’s politics or any other market-moving events, it’s critical to remember how often unforeseen news has a bigger near-term impact than that which we’re already aware of.  For example, in November 2020 markets, the pleasantly surprising approval of Pfizer/Biontech and Moderna COVID-19 vaccines seemed to trump all the politics at play.

Are You Feeling Lucky?

“The idea is that you have to take risk to get ahead, but no risk that can wipe you out is ever worth taking. The odds are in your favor when playing Russian roulette. But the downside is not worth the potential upside.” — Morgan Housel, The Psychology of Money

In conclusion, by my unscientific estimate, 9 out of 10 investors who ignore these and similar financial history lessons are most often destined to make great mistakes; and costly ones at that.

What about that tenth investor?  Every so often, a few lucky souls score big on bitcoin or what have you.  You know who they are, because they receive so much attention in the popular press or perhaps brag about in a social (albeit virtual) setting.

Are you tempted to give that a try?  2020’s lessons are clear:  Whatever 2021 may have in store, we advise against seeking to beat tall odds to get ahead.  Sticking to your financial plan doesn’t guarantee 100% success.  But it remains your most dependable bet in a world of future unknowns.

How else can I assist you with your financial well-being in 2021?  Let me know!