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October 30, 2020

Lessons We Learn Again and Again

Fall 2020 Quarterly Newsletter

Author: Larry W. Carroll, CFP®

I was reading an article recently about the lessons we can learn from the 2020 market. It seems that many lessons from the market are timeless. If we didn’t learn them this time around, we’ll probably have the opportunity to learn them again down the road… To me, the lessons to note include:

1. No amount of economic commentary or market forecasting can ever prepare us for truly dramatic events, which always seem to come at us out of nowhere. “You don’t get hit by the train you see coming,” as they say. Thus, trying to create an investment strategy out of expert prognostication (much less financial journalism) always sets investors up to fail. Instead, having a long-term plan and focusing on that plan through all the fears and fads of investing during a lifetime helps us avoid abrupt and emotional decisions.

2. The equity market dropped 34% in 33 days this year. No one has ever seen that precipitous of a decline ever before. But with respect to its depth, it was just about average. This is because the S&P 500 Index has declined by around one third on average of every five years or so since the end of World War II. But during those 75 years, the S&P 500 Index has gone from about 15 to where it is now. What’s important to note is that at least historically, these declines are temporary.

3. Almost as suddenly as the market crashed, it completely recovered and surmounted its February 19th all-time high on August 18th. Note that the news concerning the virus and economy continued to be dreadful even as the market bounced back up and stabilized. It’s compelling that the speed and trajectory of a major market recovery very often mirrors the violence and depth of the preceding decline. What’s also important is that the equity market most often resumes its advance and may even go into higher territory before the economic picture clears. If we wait to invest until things “look better,” history teaches us that we may have missed a very significant part of the market advance.

4. The overarching lesson of this year’s swift decline and rapid recovery is that the market simply can’t be timed. Hopefully, some of you are already familiar with these. These are the investment policies we have been following all along and if anything, our experience this year has validated this approach even further. That doesn’t mean that as investors we should close our eyes, hold on tight and ride along. However, before you start to believe that this time is different, remember that these lessons should be fundamental to us all.

This article was featured in our Fall 2020 Quarterly Newsletter available here:

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