As this challenging year comes to a close, it is a good time to look back on an extraordinary and wild ride in the stock market and reflect on one of the main investment principles that we adhere to at ML&R Wealth Management—having an investment plan and sticking to it. At a minimum, a good, long-term investment plan involves having a target portfolio allocation (ex: 60% stocks and 40% bonds) based on your goals, age, and risk tolerance, and letting those targets drive your trading decisions.
One thing we can be happy about as investors this year is that, despite all the economic challenges, the stock market is in pretty good shape. The S&P 500 Index opened the year at 3,231 and closed almost a full year later on Friday, December 16th at 3,701. If you had just woken up from an 11-month hibernation you might think, that’s great! The market is up over 14% year to date! We know of course there was more to this story, with some rather harrowing moments between these two points in time. Students of stock market history would be hard-pressed to find a more pure, textbook example than 2020 of the importance of sticking to your investment plan and not panicking or making rash trading decisions. We were provided with not one, but two major events in an incredibly short timespan that challenged our ability to remain resolute and not abandon our investment plans. The first was an unknown, unplanned event (the coronavirus pandemic); the second was a known, planned event (the election in November). In both cases, despite everything we know about the long-term positive trend of the stock market, even the savviest investors can be excused for having a moment or two of doubts.
Around the middle of February as news began to emerge about the seriousness of the global health crisis, the US Stock Market experienced its fastest 30% decline in history, dropping a staggering 34% in a mere 33 days. By the middle of March, many investors were wondering if they should head for the exits and move all their money into bonds or cash until things “settle down and return to normal.” As tempting as this may have seemed, the danger in doing this is that you are likely to miss out on the inevitable recovery. By the time things look like they are back to normal in our daily lives, the stock market train may have already left the station, as it is a leading indicator and tends to recover long before the broader economy does. Buying back into the market at this point can be very expensive. Essentially, to time the market correctly like this, a speculative investor would have to be right twice–both at the exit point when they sell, and the re-entry point when they buy back in. Since none of us have a crystal ball, this is virtually impossible, especially repeatedly over long periods of time.
Luckily the investors who did not succumb to their fears were soon rewarded. Almost as suddenly as the market declined, it began a surprisingly rapid and robust recovery in April. By Labor Day weekend the market was not only higher than it was in March but was 10% higher than at the start of the year! The unfortunate investors who sold during the dark days of March were left wondering if they would ever get a chance to buy back in at the same price at which they sold. This is a tough psychological trap of regret in which to be caught. You must decide whether to accept your losses and buy back into the market at a higher price than what you sold for or hope that you are eventually presented with a cheaper buying opportunity. History has repeatedly shown us that betting against the US Stock Market can be very costly.
The second period of market decline in 2020, while not as dramatic as the first, came after a summer of rising coronavirus cases and amidst one of the nastiest and most contentious presidential elections in recent memory. The stock market dropped about 4% in September and another 3% in October. Once again, many experienced but exhausted investors began to question their investment plans and wondered if they should move out of stocks and into bonds and cash until after the election. Of course, we survived the election, and news of promising vaccines emerged. And once again, the wise investors who remained faithful to their plans were quickly rewarded with another robust recovery of about 10% since the pre-election market jitters low point.
Does any of this mean we are out of the woods now? We have no way of knowing that now. It is possible that the market may suffer more short-term corrections soon. Short-term volatility is something we must live with as long-term investors. It is also equally possible that the coronavirus vaccines that are now being distributed will lead to a healthy economic recovery and accompanying new market highs. As advisors, we understand and sympathize with the pain investors feel when we are in the middle of dark and difficult times. It is important to remind ourselves that for almost a century, the stock market has returned about 10% per year on average. In order to enjoy this average though, you must stay invested through the most difficult periods of uncertainty.
A better question than “are we out of the woods now” is, do you have a solid, long-term investment plan, and an experienced advisor to counsel you through the good times and bad, and help you make the right decisions for you and your family? If the answer is yes, then please take comfort in your plan when the next crisis emerges, and try not to worry about your long-term well-being. If you have any questions or would like to discuss your investment or retirement plan, or work on creating one with us, please reach out. We are here to help.
Also, we at ML&R Wealth Management wish you and your loved ones a very safe and happy holiday, and a brighter 2021!
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