Two lessons investors should learn from 2020
By David Haggard, CFA®, CFP
2020. What a year. The coronavirus pandemic ravaged our country. Millions lost their jobs and hundreds of thousands lost their lives from the virus. We spent the year collectively holding our breaths for the next tragedy on top of deep concerns for a teetering economy.
With a sigh of relief, we can see 2021 is looking up. The vaccine is rolling out and both the Dow Jones industrial average and the S&P 500-stock index finished the year at record highs, gaining 7.2 percent and 16.3 percent, respectively. Wall Street started 2020 on the rise and ended the year in a bull market. We went through a short decline and experienced the fastest bear-market recovery in 30 years.
The year has ended, and we find ourselves in a not-so surprising economic situation — that is, if you take the long view of the history of our financial markets. We’ve been here before, but human memory is short. We easily forget recent lessons learned when the Internet bubble burst, 9/11 hit, and the real estate market crashed.
Over long periods of time people make rational investment decisions. It’s in the short term that emotions can get the better of us.
When we face another financial crisis — because we will — here are a few lessons that investors should take away from 2020.
Don’t fight the Fed. On March 15, 2020, Jerome Powell, chair of the Federal Reserve, called an emergency meeting to cut its key interest rate to near zero in an effort to buttress the economy hit by the coronavirus and pledged to keep interest rates near zero for several more years. The Fed also pledged to buy $700 billion in government securities. The Fed’s monetary policy, along with legislative fiscal policy actions like PPP, CARES and stimulus checks, stabilizes the financial system and contains the systemic risk that may arise in financial markets.
Remember, it’s the Fed that is running the show. It’s not the day traders, it’s not the speculators. When the Fed is bullish you should be optimistic, when its bearish, proceed with caution.
Don’t mix politics and financial decisions. In other words, don’t let your emotions about politics cloud your decision making. Take Apple stock, for example. It’s rational to think that gross sales would drop during the pandemic due to huge losses in employment. But regardless of who wins an election, the stock price is still determined by how many iPhones are sold, not who’s in the White House. A “cheek in a seat” is not going to make a difference.
Learn from 2020, batten down the hatches during a financial storm, but don’t tear your house down. If your house is strong enough, you’ll weather the storm.
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