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The year 2020 began with bright promise as unemployment reached historic lows, and the financial markets hit new all-time highs.
The pandemic arrived and changed everything. The abrupt lockdown and subsequent shutdown of the global economy seemingly stopped the earth from turning, and it appeared that the good times would become a distant memory. Markets crashed at breakneck speeds as financial losses unfolded in a matter of weeks. Uncertainty was at an apex, and 2020’s vision became opaque.
The financial markets eventually found a bottom and turned up. No one rang a bell, and the world was still on lockdown, but the doomsday predictions began to fade. The markets started climbing to new all-time highs only months later.
In 2021, investors can reflect with 20/20 hindsight on five important lessons and reminders to successfully inform portfolio construction for 2021 and prepare for future uncertainties and potential market turmoil.
This familiar phrase took on renewed clarity in 2020 and the beginning of 2021. It underscores the importance of having a comprehensive financial plan to help prepare for the highs, lows and middles. The economy and investments move in cycles over time, and recessions and market corrections could happen about every decade.
Recognizing this reality, and planning for it, can help investors stay the course and avoid making impulsive decisions that could harm their financial health. After what Americans experienced in 2020, thoughtful investors can plan and prepare for unexpected events before they take place instead of being caught flat-footed in the future. Having a clearly defined “road map” will help to navigate the unforeseen potholes of life in 2021 and beyond.
Let’s face it, 2020 was an anxiety-provoking year. The rapid spread of a deadly virus, coupled with global lockdowns, caused an historic market plunge and spike in unemployment and challenged even the most stoic of investors. However, if investors acted upon their fears and sold investments at the wrong time, they may have completely sabotaged their financial goals. Acting impulsively on news headlines or social media posts can quickly derail long-term objectives.
Investors should keep in mind the long-term trend and direction of the financial markets and not focus as often on short-term movements. Keeping sight on the financial destination can help prevent costly distractions. Should volatility come in 2021, it may create a rebalancing opportunity for portfolios. Depending on an investor’s allocations, it may be time to trim from the overweight sectors to bolster the underweight holdings. For younger investors, there may also be some buying opportunities with dollar-cost averaging, a systematic way to continue to invest through periods of volatility.
The year 2020 underscored the unpredictability of the market. Knowing exactly how or when the financial markets can turn is a fool’s errand. Looking to 2021, investors should use this knowledge to play the long game. Historically, innovation and growth have prevailed in the long term, and this should provide reassurance that a crystal ball is not necessary for financial success. Rather, savers should develop a robust financial plan, stay the course and take advantage of a market plunge. Warren Buffett advises investors to be “greedy when others are fearful and fearful when others are greedy.” This is a recipe for buying investments at advantageous prices. It feels counterintuitive, but it’s a discipline that can help build a solid financial future.
Ironically, it was only a few years ago that investors and economists questioned whether the Federal Reserve’s tool chest was sufficiently robust for the new economy. The events of 2020 underscored just how powerful coordinated fiscal and monetary tools can be. The historic liquidity injected into the U.S. economy not only helped stabilize financial markets, but also brought renewed confidence.
Further, the Federal Reserve clarified its intention to keep interest rates low through 2023, demonstrating a continuation of this accommodative policy, which should further provide support for the financial markets. In 2021, investors should consider focusing on quality fixed-income allocations to allow the best protection from potentially volatile markets.
Many investors know that putting all of their investment eggs in one basket is dangerous. For example, investors who overweighted energy stocks in their portfolios going into 2020 – believing that the strong economic activity seen early in the year was going to drive share prices higher – would have found themselves staring at sharp losses as pandemic-induced closures and lockdowns dramatically decreased energy demand. Spreading investments across different sectors, asset classes and even geographies can help to mitigate risk. For that reason, when it comes to investing for 2021, be sure to diversify your portfolio. Knowing what your target asset allocation is and periodically using times of market disruption to rebalance toward those targets can help keep your plan on track and smooth out the inevitable bumps in the road.
While many of Americans have left 2020 in the rearview mirror, thoughtful investors would be wise to pause and reflect upon the many lessons 2020 reinforced. As investors look to 2021, the past year has taught them to prepare for the unexpected, keep emotions in check and stay focused on long-term goals.
Information contained herein is from sources we consider reliable, but is not guaranteed, and we are not soliciting any action based upon it. Any opinions expressed are those of the author, based on interpretation of data available at the time of original publication of this article. These opinions are subject to change at any time without notice. Investors should also remember that past performance is not necessarily an indicator of future performance and D.A. Davidson & Co. makes no guarantee, expressed or implied to future performance. Investors should consult their financial and/or tax advisor before implementing any investment plan.