*Illustration by Donna Grethen / Albuquerque Journal
2020 was a horrific year in many ways.
The COVID-19 pandemic led to over 400,000 deaths in the U.S., over 22 million people lost their jobs, and the U.S. economy lost billions of dollars.
Meanwhile, a new administration was sworn in on Jan. 20, faced with three major crises.
The new president must deal with 1) the raging pandemic, 2) the economic problems due to so many Americans being out of work, and 3) the newest crisis that became painfully apparent on Jan. 6 — the insurrection on the U.S. Capitol building in Washington, D.C.
Although some reports describe those involved in the insurrection as “Trump nationalists,” the participants were expanded to include off-duty police officers and far-right militants including white supremacists, members of QAnon and the Proud Boys.
Clearly, the 74 million Americans who voted for ex-President Donald Trump do not all support the insurrection and violence. However, it is clear that there is a deep division in our country that cannot be ignored.
What’s next on the political front? In my view, we need to start to heal as a nation and to embrace American values, such as honesty, integrity and hard work. Americans need to acknowledge that we need a healthier path forward than the past four years. In addition, the Republican party needs to find a way to develop a platform without Trump, and we need to re-establish relationships with our allies abroad. At the same time President Joe Biden and Congress need to work together to help our economy recover and to help families who have suffered due to the pandemic. These are challenging times.
A Review of the Financial Front: Surprisingly, although 2020 was painful in many ways, it was a positive year for investors.
How can this be?
It became apparent during 2020 that Wall Street does not have a soul. There was a major correction in February and March in which the S&P 500 index lost 34% (from the peak), followed by a swift recovery. For all of 2020, the S&P 500 had an excellent year, gaining 16%. The correction during February and March occurred because the severity of the pandemic (and the potential economic impact) became apparent in February.
However, during the time when George Floyd was killed in late May and the ensuing Black Lives Matter protests, the stock market did not waver. During the very divisive presidential election it did not waver, and Jan. 6-8 (the Wednesday when the violence at the capital occurred and the two following days) the U.S. stock market went up in value.
Although Wall Street does not like surprises, it is often not impacted by political or social issues. Biden has voiced his plans to increase the top corporate tax rate to 28%. It was reduced by the Trump administration from 35% to 21%. Not surprisingly, corporate America loved the Trump tax break.
Biden is also talking about tax increases for those with annual incomes above $400,000. The U.S. is now facing enormous debt. The rapid increase in debt was established even before the pandemic led to stimulus checks and Paycheck Protection Program loans.
What’s Next on the Financial Front? I never try to predict the stock market movements in the short-term. In the long-term, investors can be confident the stock market will go up. According to Wayne Thorp of the American Association of Individual Investors, 33% of market downturns recover within one month and 80% of market downturns recover within one year. (Of course, that leaves 20% that may take much longer.)
My advice to my clients (over 20 years as a financial planner) is to “control the controllables.” We can control how much we spend, how much we save, how we invest, and (to some degree) how we live our lives. We cannot control decisions made by Congress, what happens internationally, or whether the stock market goes up or down in the short-term. Being a wise investor requires accepting the uncertainty of the financial markets.
I recommend never trying to “time the market” or shoot for the stars. Smart investors are disciplined with diversified portfolios without excess risk. They live within their means, which allows for consistent saving and investing. Their portfolios are designed to perform well in good times and bad. They follow an asset allocation that matches their goals and tolerance for risk.
Because they do not have an overly high percentage in equities (stocks), the fixed income portion will provide some safety if the stock market plummets tomorrow. Likewise, if the stock market goes up, they will participate in the growth because they have some equities in their portfolio.
This is a “buy and hold” strategy, but not a “buy and neglect” strategy. Changes are made to the portfolio when rebalancing is needed, when goals or cash flow needs change, or when changes to the assets need to be made.
Lessons From the Pandemic: We have all learned lessons from the pandemic. The biggest lesson I learned is that our greatest asset is our health. It doesn’t matter how large your investment accounts are if you do not have your health. Therefore, focusing on what you can control and taking action to improve your health (physical and mental) is a wise strategy.
My second lesson came from a headline from the New York Times on Dec. 8. It read “Jobless, Penniless and Surrounded by Wealth.” The article was about a section of the Bronx in New York, but it seemed to sum up the economic condition caused by the pandemic throughout the U.S. Whereas many families have been devastated by death and illness due to the virus, others are traumatized economically due to lost jobs and livelihoods. The fact that many investors were fortunate during 2020 reinforces our ability to help others who were less fortunate.
I have seen investors focus too much on their investments and become greedy. Money is simply a tool that should never be worshipped. As stated by psychologist Daniel Gilbert: “Money itself doesn’t make you happy. What can make you happy is what you do with it.”