Those That Don’t Know the Past Are Doomed to Repeat It: Investment Lessons from COVID-19

As I sit here and write this blog, it’s 70 degrees outside. People all around are getting vaccinated and life seems to be slowly returning back to normal. And oh yeah, the stock market is at an all-time high! Isn’t life good?  It’s crazy to think I haven’t stepped foot in my office in over a year.

I think it’s CRITICALLY important to use the past year as a teachable moment (as I say with my kids). If we wait too long to learn from it, it’ll lose its impact. As a market historian and behavioral finance nut, there are really important things to have been learned.

Let’s start with a few facts, shall we?

• On February 19th 2020, the U.S. stock market hit a peak.
• March 23rd, the U.S. stock market bottomed out capping off the quickest bear market ever.
• Between February 19th and March 23rd, the stock market dropped a total of 33.9%.
• March 23rd, 2020, technically began a brand-new bull market, as stocks rose over 20% from that period.
• August 18th, 2020, the stock market officially closed at a new all-time high.
• As of me writing this, the S&P 500 is up approximately 14% since August 2020.
• For the calendar year 2020, the S&P 500 gained 15.76%.

To sum it up, 2020 was basically a decade’s worth of movement and emotions in a year. As we start looking at the data, it makes us ask, what do we know? What can we learn from the stock markets in 2020? And what can we learn about individual investors in 2020?

We know:

For starters, 2020 was a crazy and historical year, to say the least. We saw historical market swings filled with uncertainty. I mean, this is stuff future generations will be studying for years on end. If you went to sleep on January 1st, 2020, and awoke on December 31st, 2020, you would have been very pleased with your investment returns. Unless your name is Rip Van Winkle, however, you likely didn’t have that luxury. Instead, you had to endure great emotional distress watching your investments whipsaw all over the place.

What we learned about the stock market:

We know it was a crazy year, but what can we learn from it? To begin with, the stock market is forward-looking. It generally doesn’t focus on what the current events are today, rather it looks down the road (six months or so). The stock market is also incredibly rational and, quite frankly, doesn’t care what we think. It also generally goes up and, to date, has only temporary declines, albeit some can span years. To summarize, the stock market may be a fickle beast, but only if you stay invested will it generally pay off tremendously.

What can we learn as individual investors?

One of my favorite sayings, as it pertains to investing, is ‘Investing works, Investors don’t.’ If you stayed invested last year, you were very pleased by year-end (with very few exceptions). If you tried getting cute with your portfolio, you were most likely not very pleased. We learned that emotions and money are a disastrous combination. They lead to irrational and unsound financial decisions. This means we also learned the value of working with a professional in handling your investments, as they can serve as that non-emotional buffer.

We also learned that guessing what the markets are going to do next is a fool’s errand. There was not a person on the planet that on March 23^rd thought now was a great time to invest in the markets. From an investor standpoint, what should have happened is you had the right, comfortable balance between stocks and bonds. You knew a correction was inevitable at some point. You knew we would get out of it at some point (of course not in a few months). Finally, you went about your business a little bothered by the uncertainty but knew you were well positioned and thus not truly concerned. Let me ask, does that last statement embody how you felt last year? I’m guessing not, as I had a lot of conversations with a lot of investors and that wasn’t their general disposition. Luckily, not many of our clients made drastic moves.

In summary – Investment Lessons from COVID-19.

1. The year was bananas from a stock market standpoint.
2. The stock market is a crazy thing.
3. The market doesn’t care about us.
4. The stock market generally goes up.
5. The market is forward-looking.
6. ‘Investments work, Investors don’t.’
7. We, as professionals, are valuable during good times, and invaluable during bad times.
8. Build a solid investment strategy and stick with it.
9. Money and emotions don’t work (ask Las Vegas if you don’t believe me).

What did you learn about investing and the markets last year? Remember, these are great times to sit back and reflect about what you went through in 2020. Use this time now, and let it arm you to be better equipped in the future. Because if not, you will be doomed to repeat your mistakes.

Thanks for giving a read and stay wealthy, stay healthy and stay happy.