“The most important thing is to stay the course – not to get shaken out of the market during a difficult time”
— John W. Rogers, Jr., investor, philanthropist, and founder of Ariel Capital Management
Once in a great while, there comes a year during which the economy and the markets may serve as a tutorial—in effect, a master class in the principles of successful, long-term, goal-focused investing. Two thousand twenty was just such a year.
On December 31, 2019, the Standard & Poor’s 500-Stock index closed at 3,230.78. This past New Year’s Eve, it closed at 3,756.07, some 16.26% higher. With reinvested dividends, the total return of the S&P 500 was about 18.4%. From these bare facts, you might infer that the equity market had quite a good year in 2020. As indeed it did. What should be so phenomenally instructive to the long-term investor is how it got there.
From a new all-time high on February 19, the market reacted to the greatest public health crisis in a century by going down roughly a third in five weeks. The Federal Reserve and Congress responded with massive intervention, and the economy learned to work around the lockdowns. The result was that the S&P 500 regained its February high by mid-August, and the American economy continued to demonstrate its fundamental resilience through the remainder of the year.
The lifetime lesson here: At the most dramatic turning points, the economy can’t be forecasted, and the market cannot be timed. Instead, having a long-term plan and sticking to it—acting, as opposed to reacting, which is sound investment policy in a nutshell—once again demonstrated its enduring value.
The second great lifetime lesson of this hugely educational year has to do with the presidential election cycle. To say that it was the most hyper-partisan in living memory wouldn’t adequately express it. Adherents to both candidates were genuinely convinced that the other would, if elected/reelected, precipitate the end of American democracy. Everyone who exited the market in anticipation of the election got thoroughly (and almost immediately) skunked. The enduring historical lesson: never get your politics mixed up with your investment policy.
Still, as we look ahead to 2021, there remains more than enough uncertainty to go around. Is it possible that the economic recovery and corporate earnings have been largely discounted in soaring stock prices, particularly those of the largest growth companies? If so, might the coming year be a lackluster or even a somewhat declining year for the equity market, even as earnings surge?
Yes, of course it’s possible. Now, how do we—as long-term, goal-focused investors—make investment policy out of that possibility? Our answer: we don’t, because we can’t. Our strategy, as 2021 dawns, is entirely driven by the same steadfast principles as it was a year ago—and will continue to be a year from now.
We have been assured by the Federal Reserve that it is prepared to hold interest rates near current levels until such time as the economy is functioning at something close to full capacity—perhaps as long as two or three more years.
Going forward, investors like us should consider our risk preference, our comfort level in accepting uncertainty or losses, and our risk capacity, meaning the amount of losses we can experience without risking our long-term financial goals and objectives. Equities, with their potential for long-term growth of capital—and especially their long-term growth of dividends—certainly have a role in a well-diversified portfolio. We therefore tune out “volatility.” We act; we do not react. This was the most effective approach to the vicissitudes of 2020. We believe it always will be.