© (Getty Images)Retired man in his 50s relaxing at home, surfing the internet, trendy apartment interior
U.S. stocks reached all-time highs in 2020, reflecting the divergence between fortunes on Wall Street and Main Street. The difference between Wall Street and Main Street is one of several important lessons from 2020. Investors who apply the lessons learned last year to their 2021 strategy may improve investment outcomes and reduce investment-related stress.
It was difficult for many people to reconcile all-time stock market highs with a year in which there were nearly 20 million reported coronavirus infections and more than 340,000 fatalities in the U.S., along with an estimated gross domestic product (GDP) decline of 3.5%, according to the Conference Board, and millions of unemployed Americans.
The pandemic amplified significant differences between the U.S. economy and capital markets. Lockdowns and other social distancing measures caused severe damage to GDP and employment, notably in the retail, restaurant, travel and entertainment industries. In contrast, only 7% of S&P 500 operating earnings in 2019 came from those segments of the economy, according to J.P. Morgan's Guide to the Markets April 2020 report.
The big stock market winners in 2020 included segments of the market that benefited from the "stay home" economy, including online retail, technology and home improvement. The big stock market losers for 2020 were the segments of the stock market hurt most by social distancing, including energy, airlines and brick-and-mortar stores.
Market intervention from central banks and fiscal stimulus from governments helped stem the tide of selling in March. Massive federal policy support provided needed liquidity to households, businesses and capital markets, boosting investor sentiment and reducing the risk of a widespread wave of personal and business bankruptcies.
Many good companies suffered because of the widespread shutdown in segments of the global economy, forcing investors to revisit portfolio decisions made under a very different set of economic expectations. Among the more challenging dimensions of investing during 2020 was the need to assess whether some of the companies hurt most by the pandemic would be disrupted permanently or would have long-term staying power, with hope for an eventual recovery.
Avoiding emotionally driven decisions during market downturns was a running theme last year. In fact, Morningstar's annual study of 20-year returns is a consistent illustration of the perils of market timing. Investors in the U.S. equity market for the full 20-year period through the end of 2019 earned 6.1% annually, while investors who missed the 10 best days saw their returns drop to 2.4% per year. Although avoiding the 10 worst days would boost returns, the best and worst days tend to be clustered together. The past year was no exception to the historical pattern, and many investors were hurt in their attempts to time the market.
Armed with the lessons of 2020 in hand, here are four tips that that may help improve the performance of your portfolio in 2021.
Go On a Media Diet
News junkies often obsess over the latest headlines. The activity bias is a common behavioral pattern among financial advisors who find themselves glued to business news during the trading day. Excessive trading can be one of the more damaging investment behaviors, so consuming less business and political news may be a healthy resolution for those who find themselves bingeing on the latest tweets, broadcasts and articles.
Evaluating Government Policies
Know that constraints matter more than preferences when evaluating government policies. For example, President Joe Biden's campaign platform reflected a preference for significant increases in taxes and spending. But with the slimmest of possible Democratic majorities in the Senate, Biden faces constraints on his ability to enact legislative policy preferences. Biden will need support from centrist Senate Democrats who are less likely to support substantial tax increases and policy priorities favored by the progressive wing of the Democratic party. A couple of other examples of constraints include Sen. Joe Manchin's opposition to eliminate the filibuster, which lowers the odds that Democrats can remove the filibuster and pass policy priorities without Republican support, and former President Donald Trump's appointment of conservative judges, which may constrain Biden's ability to act through executive orders or regulatory edicts.
Spend Less Time in Echo Chambers
Confirmation bias is the tendency to seek evidence that supports preexisting beliefs and to interpret information in a way that supports an existing position. The echo chamber that comes from avoiding contrary viewpoints can lead to costly investment mistakes. Seeking contrary points of view is a necessary step in testing an investment point of view and an important (albeit uncomfortable) tip for 2021.
Ask the Right Questions
Investment discussions in January are dominated by forecasts for the coming year. The most common question is: "What do you expect the market to do this year?"
For most investors, the focus on a relatively short-term time horizon is understandable but counterproductive. The more relevant discussion about the investment outlook should be framed around long-term investment expectations and the alignment with financial and personal goals. Realistically, once cash needs are taken care of, most investors have time horizons measured in years if not decades.
The incredibly unreliable directional "crystal ball" for one-year periods becomes a lot more reliable over longer periods, making planning a more predictable and less stressful exercise. Consequently, perhaps the most important tip for investment planning in 2021 is to think with the long term in mind and worry less about day-to-day volatility.
Disclosures: Registration with the SEC should not be construed as an endorsement or an indicator of investment skill, acumen or experience. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser's clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.
Copyright 2021 U.S. News & World Report