Acting vs. Reacting - Kris Carroll, Carroll Financial
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January 25, 2021

Acting vs. Reacting

Author: Kristopher W. Carroll, CFA®, CFP®

Once in a very great while there comes a year in the economy and the markets that may serve as a tutorial, or better yet a master class, about the principles of successful, goal-focused investing in the long term.  2020 was certainly such a year.

On December 31, 2019, the S&P 500 closed at 3,230.78. This past New Year’s Eve it closed 16.3% higher at 3,756.07.  You might infer from these figures that the equity market had quite a good year. Indeed it did, but 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 onset of the greatest public health crisis in a century by going down roughly one third over five weeks.  The Federal Reserve and Congress responded with massive intervention and the economy learned to work around the lockdowns, which resulted in the S&P 500 regaining its February high by mid-August. The lifetime lesson here:

At its most dramatic turning points, the economy cannot be forecast and the market cannot be timed. 

Instead, sticking to a long-term plan and acting as opposed to reacting (which is our investment policy in a nutshell) once again demonstrated its enduring value.

The second great lifetime lesson of this educational year had to do with the presidential election cycle.  To say that it was the most hyper-partisan election in living memory just doesn’t come close to adequately describing it.  Supporters of both candidates were genuinely convinced that the other would, if elected or reelected, precipitate the end of American democracy.  And those 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.

As we move into 2021, we have been assured by the Federal Reserve that it is prepared to hold interest rates near current levels until the economy is functioning at a level close to full capacity, which could be as long as two to three more years.  This makes it difficult to see how we can pursue our long-term goals with fixed income investments.  Stocks and their potential for long-term growth of capital seem to be the more rational approach.  In turn, we tune out volatility.  We act.  We do not react.  This was the most effective approach to the unruly fluctuations of 2020, and I believe it always will be.

Bottom Line:  We cannot predict what 2021 will bring, but we can make smart and careful decisions about how we will invest over the coming years. 

In the News, Investing, Market Volatility

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