Investing Lessons from an Unforgettable 2020

If there was ever a year that made sense to try to time the market, 2020 was the one. The pandemic was picking up speed, hospitalizations and deaths were reported in record numbers each day, businesses were shutting down, travel dried up, unemployment skyrocketed, racial and political tensions were peaking, the government spent billions to help out people in need and it’s clearly not going to be enough. There aren’t many times when you can clearly see that the economy will be suffering in the future. You should take your money out of the stock market and put it back in when things stabilize. Right? Unless your timing was perfect or you just got lucky, this strategy would have cost you.

The stock market peaked on February 19th and spun downward quickly for about one month. Then the market recovery started even though everything about the economy and pandemic was worsening. Surely this could not continue. But it did and the recovery more than eclipsed the market losses and ended up the year pretty darn good. To me, the financial markets have never seemed so disconnected with the realities of the economy.

 In short, the impact of the pandemic were the most devastating to the real economy since the Great Depression, even though most financial markets ultimately ended the year at new highs. How did this happen? It was because of the massive stimulus package the federal government injected into the economy. Overall, the monetary and fiscal moves for the pandemic dwarfed those made during the financial crisis of 2009. Our nation’s 2nd biggest collapse in real GDP was more than offset by fiscal and monetary policy. Frankly, the markets don’t care where the money comes from.

It’s not so much what 2020 “taught” me, but rather what it reinforced.  We know markets can rise more than we expect, stay exuberant longer than we expect, and fall harder than we expect. And it reinforced some very basic investing concepts: don’t try to time the market, do have a strategy, be diversified, and stick with it.

To illustrate, let’s take a look at the S&P 500 index throughout 2020(does not include dividends). Also, you can’t buy the S&P Index itself, rather, you buy a fund that tries to duplicate its performance. Throughout the year, the index ranged from a low 2191.86 to a high of 3769.99. The chart below shows closing values on key dates.

If you simply had held the S&P 500 index throughout the year, you would have earned a little over 15%. That’s a pretty good year. But what if you bought in on 2-19, which was the day prior to the Covid-19 market freefall. This represents some really bad timing. You still would have earned almost 11% for the rest of the year. Now let’s assume you owned it at the beginning of the year, you panicked and sold it on 3-23 and never bought back in because you feared that the economy was still in for some bad times. You would be down over 31% and now the market is near an all-time high. Ouch, do you get back in now? You missed the recovery and this wealth is now gone.

What if you timed it perfectly?  Let’s assume you owned it at the beginning of the year, sold it on 2/19, bought back in on 3/23, then held it for the rest of the year.  You’d be up over 50%.  But what are the chances of getting this timing so perfectly? Just about zero percent.

One last example involves more realistic market timing.  Let’s say you owned it at the beginning of the year, and you sold it halfway between it’s peak on 2/19 and bottom on 3/23.  Then you bought back in halfway between the bottom and year-end.  You would have earned about 9.6% in this scenario. And this is actually pretty good timing.

John Bogle, founder of the Vanguard Group of mutual funds and one of my personal heroes, wrote of market timing: “After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know of anybody who knows anybody who has done it successfully and consistently.”

It seldom pays to time the market. You need to know when to get out and when to get back in. Good luck with that.