Investing Lessons from 2020
After years of economic expansion and rising stock values, COVID-19 struck in 2020. Stocks fell more than 20%, then regained that loss — and more — in just a few months. Here are four investing lessons 2020 has taught us:
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Bear markets still happen. It had been 11 years since U.S. stocks experienced a bear market — a drop of at least 20% — so it was easy for investors to forget that such steep declines occur. The good news: Bear markets tend to be much shorter than bull markets. Based on the S&P 500 index, Yardeni Research reported the 2020 bear market lasted 33 days — making it the briefest in history.
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You're more risk averse than you realized. When stocks appear only to go up, so does investors' risk tolerance. But the 34% decline in U.S. stocks in just a matter of weeks this year awakened many investors to their true ability to endure losses and market volatility.
If you took more risk than you're comfortable with, it's time to reset your asset allocation — the percentage of stocks, bonds, and cash in your portfolio. For example, someone nearing retirement might want a 55% stock/45% bond portfolio. Younger workers, though, would likely want to hold a larger percentage in stocks. Review your asset allocation once a year to make sure it hasn't strayed five percentage points or more off track. If it has, rebalance your portfolio to get back to your original allocation. For some help, see Rebalance Your Investments to Manage Your Risk.
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You can't time the market. Many investors bailed out of stocks as prices fell, to try to limit their losses. That turned their paper losses into real ones. And while they waited for the right time to jump back in, stocks rebounded so quickly that these investors missed out on the gains.
Even professionals can’t consistently predict the best time to enter or exit the stock market. But you can take the guesswork out of it by dollar-cost averaging1 into stocks — investing a fixed amount into stocks at regular intervals — regardless of what's happening in the market. To learn more about this strategy, see Take the Guesswork Out of Investing in Volatile Markets.
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The stock market is not the economy. Unemployment remains high. Small businesses are still shuttering. And the global pandemic continues to stifle the economy. So why are stocks doing so well? The stock market is a potential leading economic indicator, meaning it moves up or down based on future expectations of companies' performance. So, while the economy represents the here and now, the stock market looks months ahead.
Learn more about investing by visiting the Retirement Education Center. Have additional questions? Contact your ICMA-RC Retirement Plans Specialist.
1 Dollar-cost averaging does not assure profit or protect against loss in a declining market. Since it involves continuous investment, investors must consider their ability to continue to invest during low price levels.
Please note: The contents of this publication provided by MissionSquare Retirement is general information regarding your retirement benefits. It is not intended to provide you with or substitute for specific legal, tax, or investment advice. You may want to consult with your legal, tax, or investment advisor to review your own personal situation. Some of the products, services, or funds detailed in this publication may not be available in your plan. This document may contain information obtained from outside sources and it may reference external websites. While we believe this information to be reliable, we cannot guarantee its complete accuracy. In addition, rules and laws can change frequently.