Lessons to learn from 2020
To say 2020 was a crazy year in the financial markets is probably an understatement. It was a great year to prove that almost anything can and will happen in markets. Here are a few lessons I hope many learnt.
- Market timing is hard (if not impossible)
If I told you there would be a global pandemic that would affect the world, kill nearly two million people, and bring entire countries' economies to a complete halt, would you have been bullish? I doubt it. As Ken Fisher has said, the market is "The Great Humiliator."
Despite crippling social and economic circumstances, the S&P 500 total return was more than 18 per cent for the year. 2020 was the fastest bear market in history, and now it has become the quickest recovery in history. It took the S&P 500 only 23 days to fall 33 per cent from its record high reached on February 19. It then took just over 100 days to recover back to this point. If you had tried to time this, you must have been gutsy, quick, and precise. Suppose the fall in your portfolio made you question what you were doing or caused significant discomfort. In that case, it is now time to consider this and admit you may not have as high of risk tolerance as you may have initially thought. Ensuring your allocation correctly reflects this will help keep in you the game when the going gets tough.
2. Contrarian investing is hard (winners can keep winning)
If you were playing the contrarian card in 2020, hoping for some form of mean reversion, you were disappointed … again. Growth continued to beat value, and some sectors like technology continued to dominate. The lesson here is that momentum is a thing. It can persist much longer than anticipated. It also brings to light that in the stock market, the average stock may be a loser, and the big gains can be made in remaining invested in the winners. Hendrik Bessembider's paper lays this out: "Four out of every seven common stocks that have appeared in the CRSP database since 1926 have lifetime buy-and-hold returns less than one-month Treasuries."
3. Emergency funds are a good idea
In April of 2020, Pew Research conducted a survey which found that "43 per cent of US adults now say that they or someone in their household has lost a job or taken a pay cut due to the outbreak …" Furthermore, they found that only 23 per cent of lower-income and 48 per cent of middle-income households had an emergency fund set aside that would cover three months of expenses if they suffered a job loss, sickness, or economic downturn. Since we are still amid the pandemic, now may not be the opportune time to get serious about building an emergency fund, but for those who were prepared, the emotional and financial dividend that this sense of security offers may be priceless. Before committing an extensive amount of capital to invest, it is a good idea to set aside a rainy-day fund to cover those unexpected (yet sometimes surprisingly frequent) expenses life tends to spring on you. You do not want to be selling at the worst possible time to meet sudden emergency costs that can happen when you are financially strapped.
4. Things are not simple with easy answers
The pandemic turned several us (including yours truly) into armchair epidemiologists. People poured over spreadsheets and Rt tables trying to decern, with some certainty, the trajectory and severity of the virus. Most, if not all of us, got it wrong. In fact, in some cases, very wrong. 2020 should have humbled everyone. If you did not exit the year questioning some of the things you believed or adjusting some of your priorities, you are probably delusional. The virus progression, mutation, and debates around masks, lockdowns, and other non-pharmaceutical interventions continue to rage on. What is clear, however, is that there was never really an easy answer. Most of what was attempted to be modelled with spreadsheets were moralistic or philosophical debates all along. Morgan Housel has said it best: "If something is impossible to know you are better off not being very smart, because smart people fool themselves into thinking they know while average people are more likely to say, ’I don't know’ and end up closer to reality." In life, we sometimes are forced to decide in an environment of uncertainty that offers no definitive "correct" answer and involves trade-offs. Remember, there is no perfect in many cases, and choices often need to be made without absolutes. Therefore, stay humble and try and see others' points of view.
• '"Eye on the Market 2021 Outlook" by Michael Cemblast, JP Morgan, January 1, 2021 https://privatebank.jpmorgan.com/gl/en/insights/investing/eotm/outlook
• "About Half of Lower-Income Americans Report Household Job or Wage Loss Due to Covid-19" By Kim Parker, Juliana Menasce, Horowitz and Anna Brown, April 20-21, 2020 https://www.pewsocialtrends.org/2020/04/21/about-half-of-lower-income-americans-report-household-job-or-wage-loss-due-to-covid-19/
• Bessembinder, Hendrik (Hank), Do Stocks Outperform Treasury Bills? (May 28, 2018). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2900447 or http://dx.doi.org/10.2139/ssrn.2900447
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