Well, that was a crazy 12 months.
In 2020, the S&P 500 index dropped about 35% from its prior peak in mid-February to its low on March 20th as the health and economic impact of the Covid crisis began to dominate the news and our lives. We saw gut-wrenching swings, with daily losses of 5% and more. And just as quickly, sentiment changed and stocks came roaring back. This time, the 5% daily moves were on the upside.
Here we are, about 12 months later, and the S&P 500 is up over 70% from that low point.
Along the way, we saw a lot of those two old companions which always accompany investors on their long-term journey: Uncertainty and Volatility. We’ll see them again.
But what do we know for sure? It’s a good time to look back and remind ourselves of lessons that we’ve learned, or re-learned, over the last year. Here are a few:
You may be disappointed, but you shouldn’t be surprised.
Going back to 1926, stocks have gone down about 1 out of every 4 years. It wasn’t all that long ago, during the Great Financial Crisis of 2008-2009, that stocks dropped about 45%. So it’s happened before and it will happen again. But over the long-term, stocks have generated strong returns. During the last 15 years global stocks have annualized at about 7.1%.1
You get paid for taking on risk.
Stocks offer higher expected returns than cash or bonds precisely because they have higher risk. Those extra returns are called a “risk premium” and represent the added amount investors get paid for taking on inevitable downturns and uncertainty. If stocks didn’t go down, there would be no risk and no added returns.
You have to have a plan.
An investment plan means having a mix of cash, stocks, and bonds that allows you to sleep at night, even in the midst of a downturn. It also means having enough in cash or bonds so you don’t have to sell stocks at fire-sale prices because you need the money for expenses.
You don’t have to know what’s going to happen next in the market.
The good news? Nobody else knows, either. Markets aren’t always perfect but you’re much better off assuming the market is getting it right than trying to outguess it. Stick to your plan and think long-term.
There are beneficial steps you can take during a downturn.
With the markets dropping so dramatically, many of our clients found themselves underweighted in stocks relative to their long-term stock target. We rebalanced, buying stocks at much lower prices to bring their stock percentage back in line with that target. A smart strategy.
We also did tax-loss trading, meaning that we sold stock funds that were down significantly, realizing the losses for tax purposes. We immediately reinvested the proceeds from the sales in similar stock funds—ensuring that clients were still in the market and able to take advantage of the upturn. The tax losses can be carried forward to offset future capital gains. Another smart strategy.
The most important lesson.
Nothing counts more than your health. Please stay safe.
We’re all looking forward to better times ahead.
David Rappaport, CFP®
David is the Co-Founder and Chief Investment Officer of Rappaport Reiches Capital Management. He acts as personal CFO to entrepreneurs and corporate executives, providing organization and clarity in their finances. Please connect with David below. He loves to talk about investing, financial planning, and Aspiritech, a non-profit hiring individuals on the autism spectrum.
1. Stocks represented by the MSCI World Index (net div.), from 3/1/06 through 2/28/21. Past returns are not a guarantee of future returns. Source: MSCI data © MSCI 2021, all rights reserved.
The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only. Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.