This story was written and paid for by Mindful Money, a Berkeley wealth management company that is committed to a behavioral and mindful approach towards financial wellbeing.
Lions, tigers, and bear markets… Oh my!
The market commentary around the recent GameStop (#GME) et al. madness, following immediately on the heels of the election insanity, buried within our continuing pandemic challenges leave a lot of investors simply not knowing what to do or where to seek solid ground.
We all operate within a finance culture that is market-focused, and current-event or performance driven. However, we do not ourselves need to be so focused or so driven. In fact, it hurts us both emotionally and financially to pursue this path for managing our personal finances.
Thankfully, this is a choice. There is a better, less chaotic process of investing for folks who are simply tired of the circus. You don’t have to care about the whole short-seller vs. short-squeezer problem. If you do, that’s fine… but, be honest, does taking a side in this argument help you make better financial decisions?
Mindful Money is goal-focused and planning-driven. In this way, we are counter-cultural.
We are long-term global equity investors. We are working steadily toward the achievement of our most cherished lifetime goals. We admit, humbly, that no attempt to forecast or time equity markets can be consistently successful.
Therefore, we don’t predict; we don’t prognosticate. We take plan-appropriate risk in our asset allocations, we broadly diversify, and we remain patient and disciplined. We believe that the only way to capture the full premium return of equities is to ride out their frequent but ultimately temporary declines.
Our highest value comes through financial planning, coaching appropriate behaviors, historical perspective, and tempering reactions to “noise.”
2020, and now continuing on with the GameStop fiasco in 2021, offered a cornucopia of financial lessons that, if we are open to learning them, can change our relationship with money AND improve our individual financial outcomes at the same time.
On Dec. 31, 2019, the Standard & Poor’s 500-Stock index closed at 3,230.78. This past New Year’s Eve, it closed at 3756.07, some 16% higher. With reinvested dividends, the total return of the S&P 500 was almost 18%.
From these bare facts, you might infer that the equity market had, in 2020, quite a good year. What should be so instructive to the long-term investor is how it got there.
From a new all-time high on Feb. 19 2020, the market reacted to the onset of 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, the economy learned to work around the lockdowns — and the result was that the S&P 500 regained its February high by mid-August.
Lesson 1: At its most dramatic turning points, the economy can’t be forecast, and the market cannot be timed. Instead, having a long-term plan and sticking to it — acting-on a plan as opposed to reacting-to the market — once again demonstrated its enduring value.
Lesson 2: The velocity and trajectory of the equity market recovery essentially mirrored the violence of the February/March decline. The left side of the V collapse always roughly matches the right side of the V recovery. This is consistent with historical norms.
Lesson 3: The market looked ahead and it went into new high ground by midsummer, even as the pandemic and its economic devastations were still raging. This is how historical market recoveries have occurred. The market is discounting ALL future earnings. Pandemics and elections reduce demand for a time, but demand always returns and future earnings recover and advance.
Lesson 4: “Waiting for the pullback” once a market recovery gets under way, and/or waiting for the economic picture to clear before investing, turned out to be formulas for significant underperformance, as has most often been the case historically.
We are NOT as fragile as we assume. The American economy — and its leading companies — demonstrated their fundamental resilience through the balance of the year. All three major stock indexes made multiple new highs. Cash dividends in 2020 exceeded those paid in 2019 – the previous record year – despite the pandemic.
Lesson 5: Investing and politics do not mix, full stop. To say that it was the most hyper-partisan presidential election in living memory wouldn’t adequately express it: adherents to both candidates were genuinely convinced that the other would, if elected/re-elected, precipitate the end of American democracy.
Everyone who exited the market (or simply refrained from entering it) in anticipation of the election got thoroughly (and almost immediately) skunked. The enduring historical lesson – which we expressed numerous times leading up to the election, is this: never get your politics mixed up with your investment policy.
Lesson 6: Traders trade. Sometimes without even knowing why. There is a buyer (who believes markets will go higher) and a seller (who believes the opposite) in every transaction. Neither are evil; both are self-interested. There are rare market anomalies that produce GameStop-type trades. After the dust settles, whether someone did something illegal or not, the stocks settle back to fundamental value. Most late-coming participants will lose, but participation is always a choice. Long-term, goal-focused, planning driven investors can ignore this as noise.
As we look ahead in 2021, there remains ample uncertainty. Is it possible that the economic recovery — and that of corporate earning’s— have been largely discounted in soaring stock prices, particularly those of the largest growth companies? If so, 2021 may be a lackluster or even a somewhat declining year for the equity market, even as earnings surge?
What can we — as long-term, goal-focused, and planning-driven investors — do about this possibility? Nothing. We don’t predict. We don’t prognosticate. We don’t, because one can’t. Our strategy, in 2021, is entirely driven by the same steadfast principles as it was a year ago — and will be a year from now.
We completed a rebalance in early January. Equities, with their potential for long-term growth of capital — and especially their long-term growth of dividends — continue to seem to us the most rational approach of enabling our long-term life goals. We may own some bonds for ballast, but the returns simply (mathematically) can’t come from bonds at this point. We therefore embrace “volatility.” This was the most effective approach to the vicissitudes of 2020.
I believe it always will be.
Jonathan K. DeYoe is President of DeYoe Wealth Management, Inc dba Mindful Money, a Registered Investment Advisor. He is the author Mindful Money: Simple Practices for Reaching Your Financial Goals and Increasing Your Happiness Dividend.
You can follow Jonathan at mindful.money; on YouTube; on LinkedIn; on Facebook; on Instagram; and on Twitter.
This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where DeYoe Wealth Management, Inc. dba Mindful Money and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by DeYoe Wealth Management, Inc. dba Mindful Money unless a client service agreement is in place. Mindful Money is a service mark of DeYoe Wealth Management, Inc. a Registered Investment Adviser.
