Now that we’re a few weeks removed from 2020, it’s a good time to reflect on such a momentous year. We can think about developments in the social and political spheres, but we also learned – or perhaps re-learned – some valuable lessons about investing.
Here are four of them:
• A long-term perspective is essential. Volatility in the financial markets is nothing new, but, even so, 2020 was one for the books. Of course, the COVID-19 outbreak was the driving force behind most of the wild price swings.
Soon after the pandemic’s effects were first felt, the S&P 500, a common index of U.S. large-cap stocks, fell 34% but gained 67% by the end of the year. Consequently, investors who stuck with their investment portfolios and kept their eyes on their long-term goals, rather than on shocking headlines, ended up doing well.
And while 2020 was obviously an unusual year, the long-term approach will always be valuable to investors.
• Investment opportunities are always available. The pandemic drove down the prices of many stocks – but it didn’t necessarily harm the long-term fundamentals of these companies.
In other words, they may still have had strong management, still produced desirable products and services, and still had good prospects for growth. In short, they may still have been good investment opportunities – and when their prices were depressed, they may also have been “bargains” for smart investors.
And this is the case with virtually any market downturn – some high-quality stocks will be available at favorable prices.
• Diversification pays off. Bond prices often move in a different direction from stocks. So, during a period of volatility when stock prices are falling, such as we saw in the weeks after the pandemic hit in March, the presence of bonds in your portfolio can lessen the impact of the downturn and stabilize your overall returns.
And this, in essence, is the value of maintaining a balanced and diversified portfolio. (Keep in mind, though, that diversification can’t guarantee profits or prevent all losses.)
• The market looks ahead. The pandemic-driven market plunge may have been stunning, but it made a kind of intrinsic sense – after all, the sudden arrival of a pandemic that threatened lives, closed businesses and cost millions of jobs doesn’t sound like a positive event for the financial markets.
But the strong rally that followed the initial drop and continued into 2021 has surprised many people. After all, the pandemic’s effects were felt throughout the rest of 2020, and are still being felt now, so why did stock prices rise? The answer is pretty straightforward: The financial markets always look ahead, not behind.
And for a variety of reasons – including widespread vaccinations, anticipated economic stimulus measures from Congress and the Biden administration, and the Federal Reserve’s continued steps to keep interest rates low – the markets are anticipating much stronger economic growth, possibly starting in the second half of 2021.
All of us are probably glad to have 2020 behind us. Yet, the year taught us some investment lessons that we can put to work in 2021 – and beyond.