Well, what an interesting year this has been. You know it is not a good year when the year itself has become a punch phrase for negativity – as in, “that is so 2020”. The combination of the coronavirus hitting both our physical health as well as our financial health added to the stress all of us were feeling. Seems appropriate that this year is the year of the rat in the Chinese calendar.
The one thing that this year highlighted (in rapid fashion) was all that we believe about investing. In six months, all of our strongly held beliefs about investing were on display. The best teachable moments are always memorable and real.
So, what have we learned in 2020 which will help us over the course of our investment lives?
Here are five lessons:
The first lesson (of course) is that markets can never be timed. Even if you had foresight – which no one seemed to have – that there was going to be a global pandemic which would scare citizens across the globe, resulting in sharp declines in the global stock markets, within six months that severe downturn has almost corrected itself. It would have been hard to predict that strong correction at the depth of fear and panic at the end of March 2020.
The second lesson is that stock market declines of this magnitude are commonplace even if they are not usually at this speed. The key, as we have said many times, is to focus on the long-term value of these companies. We continued to re-balance our clients accounts on our established schedule during the decline to take advantage of the temporary sale of stocks.
The third lesson is although we have no way of knowing when a market crisis will end, we can be sure that it will end. How do we know that it will return? We use history as our guide. The return of markets after a sharp decline generally follows the same shape on the upturn that occurs after the downturn. Historically a sharp market decline is generally followed by a sharp market advance. When that advance will occur is the only question.
The analogy that I like to give regarding this return is like pulling a rubber band. If you pull the rubber band sharply back, then there is an equal but opposite reaction when it is released.
The fourth lesson is that the ownership of equities remains the only way most of us are going to achieve our goals. One of the most important functions is to ensure that our money continues to have the same purchasing power, especially after you retire, so that we may be able to maintain a lifestyle through what will likely be a longer time frame. Equities are the only asset that has historically been able to achieve this important function.
The fifth and final lesson is that optimism remains the only realism. Humans have overcome incredible challenges throughout the centuries, and we are on our way to overcoming the latest challenge. The future is bright for the globe which will help all those investors who stay the course and have learned these lessons.
In this year’s market cycle, all investors learned everything that they need to know. For those who have not yet learned these lessons, they are dealing with the regret that they capitulated near or at the market bottom.
Hope you have a great week!
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