The US stock market, measured by the S&P 500, has hit an all-time high! Let me repeat that for dramatic affect. In the face of a pandemic and record unemployment, the markets have had a historic recovery from a historic downturn. Now, we can all sit here and question the reasons, or lack of reasons, why it has done so. However, for this article I’d like to focus on the lessons learned (or those that need to be reinforced).
Most of the things below you’ve likely heard at some point. That said, the recent few months have been a great lesson pertaining to the markets. It was such a condensed time filled with massive emotions, fears, and uncertainty. Essentially, we all just got a massive crash-course in “Markets 101.”
I like to think of myself as a student of the game and I never want to stop bettering myself or my craft. I truly love what I do and find it fascinating in so many ways. That’s why I’d like to share the principals that were reinforced with these past few months in the markets.
1. Diversification is key– Not a shocker coming from a company named Diversified is it? But truly, the saving grace for a lot of people was a well-diversified portfolio. While the sky was falling in March, diversified clients had asset classes that stood the test of time. Things like bonds, and a certain few stock, didn’t plummet. Those who had all their money tied up in company stock may take years to recover and are seeing the opposite side of diversification.
2. The right balance – Much like most things in life, balance is key. This holds true when it comes to your investment portfolio, too. If you aren’t comfortable with market movements, in either direction, you should have less tied to the markets. Those clients who had the appropriate risk exposure felt more comfortable knowing their less-volatile assets were behaving as such. If you need an asset allocation tune up, now is the time.
3. Emotions are a hell of a drug – The past six months tested all of our emotions. I’ve taken some panicked calls and had to keep repeating the same mantra: “This too shall pass.” In the face of uncertainty, very rational and intelligent people make very irrational and unintelligent decisions. Sadly, it isn’t always their fault, as we have a predisposition biologically to do so for survival (the fight or flight mechanism). I was even on calls with other advisors in some of my study groups trying to calm their nerves. This really tested our mettle to practice what we preach.
4. Guessing rarely works – And I mean, rarely. This past dip was a heck of a wakeup call. I had clients wanting to get out (and into) the markets. While most held the course, some were buying and selling stocks left and right. I’ve seen just about all of it in terms of the guessing, including when things would turn around. The only thing I’m fairly certain of is that no one I know of, heard of, read about, or tweeted about, had the markets coming back to all-time highs by August. The moral here is that the guessing game is a fool’s errand.
5. Time is on our side (yes it is) – We’ve all heard the adage “time heals all wounds.” Well, no truer words can be spoken when referring to the stock market. Since the dawn of the markets, if you give a down turn enough time, it has returned to all-time highs. This is simply a fact. If you’re investing in the biggest, most successful, and greediest companies on earth, you’ll come to the same realization. Time is your panacea.
6. Markets are unpredictable – You juke, the markets jive. You go high, the markets go low. You think this, they think that. We don’t have a crystal ball and the markets are impossible to predict. If you’re going to invest in the markets, know this as a fact and let it provide you some solace.
7. Markets are predictable – You’re messing with me right, Andrew? Didn’t you literally just say in number six they aren’t predictable. Yes, I did. (I guess I should elaborate.) Here’s what we know, and if you don’t believe me, look at a chart of the markets since the beginning. They go up and down all the time, but if you looked at the trend, they eventually have always gone up. So yes, the predictability here is that they’ll go up, but there will be moments (which could last years) of down turns. Don’t believe me? The S&P was 86.12 in 1965, today it is over 3,440. There has been a ton of recessions and down turns between then and today.
8. The investing timeframe is a forever timeframe – The stock market is a place to invest for your lifetime. It’s not a temporary thing. I have clients who rely on the markets from their 20s to their 90s. Think big picture here and not myopically. I always say wouldn’t it be nice to fall asleep for a bunch of years (like Rip Van Winkle), only to wake up and realize your investments are worth a lot more than when you started? Do you care what happened in between then and now? The point is that investing is a marathon, not a sprint. It doesn’t end arbitrarily when you retire, or get to Social Security age.
9. As humans, we adapt – Ever go through a really tough time in your life and wonder how you’ll survive? Have you lost sleep over bad news for you and/or a loved one or friend and wonder how they’ll recover? Somehow, we adapt. Humans are resilient and adaptable creatures. When you’re investing, you’re buying into companies run by humans. These companies thus adapt as well. Remember when the machine was going to take out the factory worker? Or when computers were going to replace office workers? I was petrified of the movie Lawnmower Man as a kid, as I feared virtual reality would become reality. My point is you don’t have to know the end to believe in our adaptability, which directly translates to stock market fluctuations.
10. What we do matters – I mean, it really matters. Over the past few months, my partners and I have personally been responsible for protecting people against themselves. We’ve created more value in a year like this than last year when markets were up (and over) 20%. Sometimes, I get so busy that I lose sight of the fact that the good times are easy to brag about. However, the war is won in the trenches, and it’s in those trenches when things go bad.
Back to school
With school starting back up, I thought why not share what I learned and teach it all to you. Heck, since my kids are going back virtually, you’re basically learning the same way they are! Crazy world we live in these days, but I know we’ll revert back to normalcy in the future, even if it is to be a new normal.