2020 will be a year we will never forget. From a global pandemic and civil unrest to an economic downfall that we continue to battle through today. Last year was a challenging time that has impacted millions of individuals around the world.
For investors, I think it’s critical we revisit some lessons learned to better ourselves moving forward.
Here are seven timeless principles that can come in handy in any given year:
1. Have an investment philosophy that you stick to
Whether you call it an investment philosophy, a roadmap, or a gameplan, use it to serve as a compass to guide you through turbulent times. When you’ve got a compass, it doesn’t take drastic directional changes to find your way. Small adjustments may be all you need to stay on course.
While there is no silver bullet, adhering to a well-thought-out investment plan is key. Your plan should be previously-agreed upon and will come in handy during periods of volatility. It will help you remain calm during periods of short-term uncertainty like we witnessed in 2020.
2. Create an investment plan that aligns with your risk tolerance
As investors, our risk appetite often changes based on the market environment we are in. In early March when we experienced the fastest bear market in history, some would have slept better at night knowing they had allocated more to bonds or cash. In April, when the market had its best monthly return since 1987, those same investors would have felt better knowing they were allocated more to stocks.
The main point being – know, in advance, the amount of risk you are willing to take on. You can view how various portfolio allocations have performed during previous up and down markets. The allocation you choose should match the amount of risk you can take on. And believe me, we will see bull and bear markets again. Your plan should be one that gives you peace of mind regardless of the market conditions.
3. Don’t try and time the market
The 2020 market downturn offers an example of how the cycle of fear and greed can drive an investor’s reactive decisions. Back in March, there was widespread agreement that COVID-19 would have a negative impact on the economy, but to what extent? Who would’ve guessed we would’ve experienced the fastest bear market in history in which it took just 16 trading days for the S&P 500 to close down 20% from a peak only to be followed by the best 50-day rally in history? I would be hard-pressed to find someone who had that in their market timing forecast.
Trying to time the market based on a segment from financial television? It’s very probably that the information is already reflected in prices by the time you can react to it. For investors trying to time the market the odds are stacked against you. The good news is, you don’t need to be able to time markets to have a positive investment experience.
4. Know what’s in your portfolio
Investors should have reliable portfolios with robust risk controls. Unfortunately, it often takes a market decline for many to take a closer look at what is actually in their portfolio. In times of market stress, investors rely on the fixed income portion of their allocation to serve as the ballast of their portfolio. Things like bonds help to provide downside protection. But who wants to own boring bonds when the stock market is rising. Right? Risk controls help reduce losses and provide stability during market downturns.
5. Stay disciplined through market highs and lows
Financial downturns are unpleasant for all market participants. When faced with short-term pullbacks, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility.
Over time, capital markets have rewarded investors who have taken a long-term view and remained disciplined in the face of short-term noise.
6. Look beyond the headlines
News gets frustrating to watch with all the scare tactics and negative headlines. I get annoyed watching it! While I encourage you to read the news to be informed, I don’t recommend it for advice on how to navigate the financial markets. Plus who knows if it’s real news or if there is an agenda behind it.
Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. When headlines unsettle you, consider the source and take it with a grain of salt. Growing wealth has no shortcuts.
7. Focus on what you can control
To have a better investment experience, people should focus on the things they can control. Things like having an appropriate asset allocation, diversification, and managing expenses, turnover, and taxes. Sticking to a long-term plan that is in line with your risk tolerance requires discipline, but is certainly controllable.
Sometimes this is difficult for those who try and manage their investments on their own. A financial advisor can help create an investment plan based on market principles, informed by financial science, and tailored to your specific needs and goals. Along the way, an advisor can help clients focus on actions that add investment value such as managing expenses while maintaining broad diversification. Equally important, an advisor can provide knowledge and encouragement to help investors stay disciplined through various market conditions.
By following some of the steps, investors should be better able to look past short-term noise and focus on investing in a systematic way that will help meet long-term goals. Give a call if you need help with any of the above.