Occasionally, we get a year that teaches us something fundamental about the economy and serves as a master class in the principles of long term, goal-focused investing. In the last 100 years, 1929, 1945, 1989 and 2008 were all pretty big ones.
We can all agree that 2020 is perhaps the biggest yet.
We’ll use the S&P 500 figures as a benchmark for comparison. This is because we allocate your portfolio on a market-weighted basis, so a larger slice of your investments will be tilted towards countries representing a larger part of the investing pie.
At the end of 2019, the S&P 500 index closed at 3230.78. On New Year’s Eve 2020, it closed at 3756.07 — 16.3% higher.
With reinvested dividends, the total return of the S&P 500 was about 18.4%. The stock market had, in 2020, quite a good year.
How did it happen?
From a new all-time high on February 19, the market reacted to the onset of the greatest public health crisis in a century by going down roughly a third in five weeks. Thanks to massive fiscal interventions put in place by Governments around the world. the economy learned to work around the lockdowns — and the result was that the S&P 500 regained its February high by mid-August.
What are the lessons?
The biggest takeaway: At the most dramatic turning points, the economy can't be forecast, and the market cannot be timed.
Unless you love riding really big rollercoasters, throwing £10 notes out as you go, have a long-term plan and stick to it. Act, rather than react, should be your long-term investment policy in a nutshell.
Two things are worth noting: the market recovery in the late summer of 2020 was almost a mirror-image of the decline a few months earlier. Things went up at a similar speed and trajectory to the way they fell in February and March. In addition, it hit a new high in midsummer, even though the global economy was still devastated by the pandemic.
But both outcomes were consistent with historical norms. Holding back until the economic picture cleared before investing showed yet again that trying to time the market just leads to significant underperformance.
As 2020 went on, the global economy continued to demonstrate its fundamental resilience, with the development and approval of new vaccines providing the prospect of a return to normality. All major stock indexes made multiple new highs. Even cash dividends appear on track to exceed those paid in 2019, which in itself was a record year.
The prospect of chaos thanks to the most partisan US election in living memory — another potential upset — turned out to be ‘fake news’. Almost everyone who exited the market in anticipation of the election got thoroughly (and almost immediately) rinsed. The enduring historical lesson: never get your politics mixed up with your investment policy.
At the start of a new year, there’s still enough uncertainty to go round. The economic recovery — and that of corporate earnings — may have been largely discounted in soaring stock prices, particularly those of the largest growth companies. If so, 2021 could be a much less exciting year for the equity markets, even as earnings grow.
How do we take advantage of that possibility? We don’t.
Our strategy at the start of 2021 is the same as it was 12 months ago, and the same as it will be this time next year: driven by the steadfast principles of long-term, evidence-based, diversified investing.