A global pandemic, a severe and abrupt recession, and civil unrest made 2020 a truly tumultuous and unprecedented year. But perhaps the real story of 2020 is one of resilience – the resilience of people, institutions, and the financial markets.
For the year, U.S. stocks generated a positive return of more than 20%. Non-U.S. stocks lagged but also produced positive returns. The only major asset class that ended the year in negative territory was publicly traded real estate.
There are many valuable lessons to learn from 2020 that can help us as investors in the years to come. Here are just a few.
- The best fishing is done in stormy waters: It is reasonable to assume that future stock returns will be higher when the economy is at its healthiest and the outlook is positive. But the exact opposite is generally true; it is when economic challenges seem unsurmountable and the outlook is bleakest that stocks produce their highest returns. This was true in early 2009 and was true again in March of 2020.
If we look at the returns from April 1st through the end of the year, we see that investors who stayed the course were rewarded with an astonishing stock market rally that few could have predicted in the early days of the pandemic. Those investors who had decided to “wait until the news got better” were forced to buy stocks at much higher prices or missed the rally completely. The chart below shows global returns for the period 4/1/2020 12/31/2020
- The economy and the markets are not one in the same: A related theme of 2020 was the disconnect between markets and the economy. How could the equity markets recover so quickly when the economic news remained so bleak? The market’s behavior suggests that investors were looking past the short-term impact of the pandemic to the anticipated recovery. When the terrible economic numbers were being reported in April, that news had already been factored into stock prices. As a path to an economic recovery became clearer, prices began to immediately bounce back.
- Investors should own everything: While we generally preach the virtue of broad diversification to reduce the risk of catastrophic losses, 2020 demonstrated the importance of diversification to reduce the risk of missing out on market gains. For example, airline, hospitality, and retail industries fared poorly in 2020, while companies in communications, online shopping, and technology emerged as winners. However, predicting this at the beginning of 2020 would have been almost impossible. Thus, another reason why we diversify.
Perhaps the most important lesson of 2020 was the reminder that life is about more than the size of our bank accounts and investment portfolios. Our most precious assets are our health, our relationships, and the time to enjoy experiences with the ones we love. It is this perspective that will make us better stewards of the wealth we accumulate over our lifetimes.