Two Takeaways From 2020’s Markets

By Nicholas Knoth

Although we may all want to move on and forget the disaster that was 2020, it’s worth reflecting on what we can learn from it. 2020 was a tumultuous year in many facets of life. One area that particularly stood out was equity markets. Markets seemed to always make headlines, whether that be for the sudden sell-off in March, the shortest bear market in history, the unexpected record-highs, or a handful of other unforeseen events. 

For many investors, it’s been a surprisingly profitable year; for others, it’s been a year full of losses—and regrets. For all, however, it’s been a year that reveals—or reinforces—valuable lessons into how equity markets operate and how they can generate income in the long run. 

Takeaway #1: “Never bet against America”

This is the lesson that Warren Buffet—the legendary investor and CEO of Berkshire Hathaway—wants investors to learn from 2020. In fact, the quote was taken from Buffet himself. In his fabled annual letters to Berkshire shareholders, Buffet shares his investing philosophy and takeaways from the previous years as well as a detailed analysis of his company’s performance, of course. In his 2020 letter, the legend’s message was clear: “Never bet against America.” This is somewhat of a vague maxim, yet it certainly reflects the investor’s optimistic belief that the U.S.—its innovative spirit and capital markets—can ultimately rebound from any crisis. 

Looking at some data, it’s clear that this was not the mindset many investors adopted last year. In March of 2020, as the virus began to spread internationally and as chilling economic prospects emerged, millions of investors lost faith in the markets: a staggering 42% of American investors sold at least one stock, and 24% sold their entire portfolio since March. The sudden rush to sell equities caused some of the worst single-day drops in the history of U.S. markets. On March 9, 12, and 16, the Dow Jones Industrial Average (DJIA)—the index tracking the 30 largest publicly traded firms in the U.S.—dropped 7.79%, 9.99%, and 12.9%, respectively. Between mid-February and late March, the DJIA had fallen roughly 37%. That’s a scary drop, especially when considering that the DJIA is linked to millions of retirement plans. As investors rushed to sell their positions—and buy heaps of toilet paper—the economic outlook grew worse and worse. Investors’ preference of cash over equity last year demonstrates that millions of investors were, in a way, betting against the U.S. economy. 

Soon enough, though, equities were back in a bull market. By the end of 2020, the DJIA’s year-to-year return was 6.6%. The S&P 500—the U.S. index tracking the largest 500 firms—was up 16.3%. Finally, the tech-heavy Nasdaq Composite—an index tracking almost all stocks on the Nasdaq exchange—was up a staggering 43.6%!

In other respects, Buffet’s adage seems to ring true as well. While major global players like Europe and Canada struggle to vaccinate their populations, the U.S. makes promising strides towards recovery with its rapid vaccination rollout. Take China, Germany, and Canada, for example, which have (as of writing) roughly 8, 15, and 14 individuals vaccinated per 100 people, respectively. The U.S., on the other hand, has vaccinated approximately 43 per 100 people

This is not to overlook the serious problems that transpired in the U.S. last year, such as the unbelievable death tolls, ever-worsening polarization, and social justice issues, but it does suggest that the U.S. and its capital markets will, in fact, overcome the pandemic and might do so at a faster pace than many nations.

Although it’s “still hard to evaluate” the long-term implications of the pandemic, Buffet is confident that the U.S. economy will endure the pandemic and, basically, any other challenge that develops. Citing past crises overcome by the US such as World War 2, 9/11, and the financial crisis—each of which he claims to be worse than the pandemic—Buffet remains convinced that “nothing can basically stop America.” If Buffet’s insights don’t instill confidence in the U.S.’s long-term capital growth potential, I don’t know what will. 

So what does this mean? For investors in U.S. markets with long-term horizons, the takeaway is that all crises, no matter how dire they seem, are overcome. Thus, it is wise to stay the course on an investment plan instead of abandoning it when unpredictable times present themselves. This seems obvious now, but, as mentioned earlier, 42% of American investors felt the need to sell when panic set in. 

Another consideration in regards to bear markets during crises is that they are typically followed by pronounced rallies. Consider the figure below, which illustrates exceptional returns after historical bear markets. 

If it’s known that equities are likely to have strong upward momentum following a crash, why don’t investors just sell right before a crash, buy at the dip, and then enjoy excellent post-crash returns? Well, that brings me to the second takeaway. 

Takeaway #2: Time in the market beats timing the market. 

Buy low and sell high, right? It’s easier said than done. We’ve all heard the stories of hotshot investors that know when to be in—or out—of markets. For example, Bill Ackman—CEO of hedge fund Pershing Square Capital—netted $2 billion from shorting the market during the 2020 crash. 

The data shows that it’s extremely risky and statistically improbable to successfully and consistently pull off such maneuvers. It’s risky because investors who incorrectly time the market risk missing out on unexpected surges in markets. The unexpected growth in the technology sector (and the market in general) after last year’s crash is a case in point. Many who sold their positions in March missed out on one of the strongest rallies in history. Just months after cashing out on stocks at new lows, many investors felt the need to buy back at new highs—indeed selling low and buying high. Again, the data supports this notion: 88% of investors who sold stocks last year regret doing so and 48% reported losses as the pandemic unfolded. It’s worth noting that individual investors weren’t alone in underperforming the market. According to S&P Dow Jones Indices data, 60% of actively managed large-cap funds in the U.S. lagged the S&P 500 last year. Shockingly, that marks the 11th consecutive year in which the majority of large-cap funds underperform the market average. 

Additional data further convey the risks of attempting to time the market rather than simply buying and holding. According to CNBC, a $1,000 investment in the S&P 500 in 1970 would have ballooned to roughly $139,000 by 2021—a great return. If you missed the day with the biggest jumps, however, this return would shrink to $124,000. Worse, if you missed the best 5, 15, or 25 days, the once-admirable return would contract to roughly $90,000, $52,000, and $33,000, respectively. So, instead of potentially missing the best days by trying to avoid the worst days, why not just buy, hold, and earn average returns?

Granted, the market’s returns last year seem unjustified, given that the general state of the U.S. economy was quite worrying: unemployment rose to nearly 15 percent in April (the worst since the Great Depression), thousands of businesses were lost, and there was no clear path to recovery. But that’s exactly the point: markets are unpredictable, so why bother trying to time them? If the majority of “pros” can’t consistently time the market correctly, why should anyone else be able to?

Instead of trying to time the market, experts like Warren Buffet and Burton Malkiel, the Princeton University economist famous for writing A Random Walk Down Wall Street, suggest investing primarily in market indices like the S&P 500 and DJIA. (In fact, Buffet has already decided that 90% of his wealth will be invested in the S&P 500 when he dies.) In doing so, investors expose their portfolios to potential crashes—March 2020, for instance—but they also expose them to a consistent upside, which, historically speaking, has significantly outweighed the downside and has averaged a nominal 8% return since 1957. 

To summarize, last year’s markets reinforced two commonly accepted investing lessons that often go unheeded in practice. First, don’t abandon an investment strategy in U.S. markets purely because a crisis emerges. In the long run, history shows that staying the course will earn a handsome return. Second, avoid trying to time the market—or making frequent trades, for that matter. This behavior results in higher commissions, higher capital gains taxes, and higher chances of missing out on unexpected rallies, each of which hurt bottom-line returns. Instead, opt for low-cost market indices like the S&P 500 and DJIA that are proven to generate steady returns over the long term. 

Although we’re already a quarter into 2021, there’s still lots to unpack from 2020. I hope these two takeaways from 2020 have offered some useful insights that you can consider—and implement—in your investment strategies.