Like so many sectors, the year 2020’s stock market performance will go down as one of the most volatile in recent memory. We reached new highs early in the year only to have a free fall through March and April. Then a rebound began and at this point, we are trading near or over the highs reached earlier in the year.
Obviously, the Coronavirus affected the entire world and impacted global markets in a way not seen in a very long time – if ever. Investors naturally panicked during the uncertain times so the markets reached a low in March. This seemed different than other singular events in history that had provided large, immediate and sharp impacts on the markets, but over time worked themselves out. This virus has affected the entire planet and has the potential for impacting the world for long time to come pending outcomes with vaccines and treatments.
Many investors stayed the course and most learned about their own personal levels of risk associated with the stock market. As it turns out (as of this writing), staying the course of your plan this year would have been the right decision. We even endured the election process, which concerned many. Four years ago, similar projections did not pan out either. This history illustrates my point — trying to time the market for when it will move up or come down is futile. We simply don’t know when it will move nor can we project how much it will move. So, the next best thing we can do is to create a diversified portfolio with proper allocations (assuming your risk tolerance and objectives) and rebalance it at least once-a-year.
If you invest in a 401(k), you take advantage of dollar-cost averaging by investing the same amount every month and buying the funds/stocks at different levels – more shares when the price goes down and fewer shares when the price goes up. You can also do this with IRA and 529 plans, but having it come out of your paycheck automatically is the best way to ensure it actually happens.
Diversification, allocation, rebalancing and dollar-cost averaging are the four key pillars of long-term investing. Try not to chase the market or time the market by moving in and out at random times nor let your emotions influence you, as difficult as that can be at times. It is always best to keep emotion out of long-term investing.
Let’s hope 2021 will be a much better year as we recover in the economy and make some headway on the virus.
