Extraordinary year offers familiar lessons for investors

As published in the Minneapolis Star Tribune 12/19/2020.

No matter how much a global pandemic has changed our lives, some things remain the same.

In many respects, we have never seen a year like 2020. That applies to financial markets as well. The S&P 500’s 35% nose-dive in 33 calendar days was the fastest collapse of that magnitude in its 63-year history.

The Dow Jones industrial average rose at least 1,000 points in a single day eight times (it had only done so once before this year). The VIX volatility index hit an all-time high of 85.5, eclipsing the previous record set during the Great Recession.

And crude oil prices traded below zero in April when a massive supply glut crushed short-term demand. Yet as we look at the year in review, the lessons investors can learn are for the most part familiar ones.

In that regard, 2020 did not lead to major financial revelations as much as it did reinforce proven investment principles. The rules that will lead you to successful long-term investing remain as true as ever.

Rule 1: Ignore the doomsday predictions. When it comes to financial forecasting it’s usually the loudest voices that get heard, not necessarily the wisest ones. In the midst of a market sell-off, it’s easy to think about worst-case scenarios, and media personalities — especially in this age of polarization — are happy to fuel those concerns if it leads to more clicks and bigger headlines. The U.S. economy has withstood dozens of “disasters” and overcome all of them. COVID-19 is the latest illustration.

Rule 2: Volatility creates opportunity. Every bear market and every recession are different, but the one common theme is that all of them are followed by a recovery. It was impossible to know in March how long it would take stocks to recover from their coronavirus crash, but history made it clear a rebound was inevitable. Corrections create buying opportunities. It’s as simple as that. Don’t fear the negative moves in stock prices. Embrace them.

Rule 3: Don’t let your politics drive your investment decisions. Conventional wisdom suggests Republican leadership is better for the economy. Did you know that since 1952, the S&P 500 has averaged gains of 10.6% annually under Democratic presidents compared to 4.8% under Republicans? That does not imply politics are the reason for the relative performance and that’s exactly the point! Even in a year with extreme political polarization and a contested election result, the stock market hardly wavered.

Rule 4: Stay invested at all costs. It’s OK to trim equity exposure, especially if you are overweight long-term targets or take regular portfolio withdrawals. The fact that U.S. equities trade near all-time highs, however, is evidence that staying invested has always proven profitable. As one client told us in March, “This is my fourth crisis. I’ve found that if I do absolutely nothing, everything will turn out fine.”

Rule 5: Don’t fight the Fed. Yes, we’ve all heard this four-word mantra countless times. It’s still true. Despite concerns that near-zero interest rates left the Federal Reserve low on ammunition, Jerome Powell’s “whatever it takes” approach proved once again that central bank policy is perhaps the most significant near-term driver of asset prices.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

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