In year-end retrospectives over past few weeks, we’ve been reminded just how extraordinary 2020 was on so many fronts.
From the COVID pandemic to the Black Lives Matter movement to the fraught U.S. election and many other momentous events and devastating outcomes, it was a year that challenged our emotional resilience like none other in recent history.
It was no different in the markets. The stock market crash in March gave way to a lightening fast recovery. For investors, 2020 was a real-time, high-speed test of our risk tolerance and how well we’re able to control our emotions in the face of exceptional volatility.
To learn the investment lessons of 2020, it’s instructive to think back to how we all felt at various points during the year. The initial market plunge understandably provoked fear in many, especially because it came at a time of great uncertainty in other areas of our lives, as we navigated a health and economic crisis.
When the markets rallied, many investors were still processing the crash and were distrustful the recovery could be sustained. As it became clear, massive governments and central banks interventions were supporting the economy and markets, investors became increasingly confident in the rally’s durability.
The remarkable market gains since March have once again been concentrated in the technology sector where enthusiasm has been fuelled by the economic effects of the pandemic, including remote work and online shopping. And then there’s Tesla—a phenomenon unto itself.
When fear fades, regret often takes over. How much money could you have made by betting on a few big tech names rather than broadly diversifying your investments?
How about the strength of the U.S. stock market versus developed and emerging markets elsewhere in the world? Wouldn’t it make more sense to concentrate on the U.S. market.
However, if 2020 taught us anything, it’s just how unpredictable the markets can be. Our portfolios must be designed to both weather unexpected developments and take advantage of favourable outcomes.
As investment author Larry Swedroe observed in his review of the book, The Psychology of Money by Morgan Housel, these are not easy psychological waters to navigate.
“Unexpected events and random luck can lead to good decisions having bad outcomes and poor decisions having good outcomes,” Swedroe writes. “Success is a lousy teacher because it can seduce us into thinking we cannot lose. Thus, we should not become overconfident in our judgments when things turn out well. Similarly, failure is a lousy teacher because it can seduce smart people into thinking their decisions were poor, when failure was just the unforgiving reality of risk showing up.”
It’s not easy for bright, successful people to accept their inability to outsmart the markets. However, sticking with a well-engineered portfolio through good times and bad is the hallmark of intelligent investing.
Helping clients manage their emotions is an important part of what we do here at PWL Capital. In that sense, we see our role as advisors helping people make good decisions, not facilitators of risky moves driven by passing emotions.
The coming year will no doubt hold more surprises, but there is much to be hopeful about with the roll-out of vaccines around the world. We will be here to keep your investments and personal finances on track, and the whole PWL team wishes you a happy, healthy and prosperous 2021.