No one really likes a look back, especially when talking about the stock market. The past is done, it happened, and there’s no money to be made there. The juice to squeeze is the potential, the future, the edge, the unknown.
But even though we know how the dice rolled, taking a moment to see whether we’ve learned anything is fair — and may sharpen our abilities for the future. While the future has no obligation to behave like the past, that doesn’t mean it doesn’t have anything to teach. Plus, it’s been a wild 12 months, with a tiny recession, massive government response, and the craziest roller coaster of a chart the S&P 500 has ever seen.
DataTrek’s Nicholas Colas, former hedge fund manager, has spent the year writing about the “2009 playbook,” a way of viewing the parallels between 2020-2021 and 2008-2009. For him, the biggest lesson learned was that “every crisis is the same.”
‘Every crisis is the same’
“Markets implode, sending a signal to policy makers. Policy makers respond. The size of the response informs the size of the market bounce-back,” Colas said.
Colas, surfing the delicate balance between assuming a carbon copy of the past (a common mistake) and ignoring it all together (a common over-reaction), advised clients to buy every day when the S&P 500 dropped 5% or more. This approach, created by a careful examination of the Financial Crisis, turned out to be very prescient. Even when the market dropped after the first 5% down day, Colas wrote to simply buy again — which most thought at the time would reward a long-term investor but wildly turned out to reward in a short-term time frame.
“I will admit that I was nervous about our ‘buy every 5% down day’ advice to clients when things were falling apart, but having seen everything from the 1990 Iraq invasion of Kuwait to 9/11 to the Financial Crisis I thought that was the only way to make some money from the mayhem,” Colas said. “But you really, really had to believe every crisis is the same. If you think they are unique, you'll never buy low.”
Colas wasn’t the only one to mention policy makers and responses. Neil Dutta of Renaissance Macro told Yahoo Finance the biggest takeaways for him were the U.S.’s defenses, at least from a stock market perspective.
“The U.S. has enormous fiscal capacity,” he said. “The economy is resilient, and the consensus is chronically fighting the last war leading it to underestimate the speed of recovery.”
We learned how bad panic can hurt a portfolio
The line between prudence and overreaction can be hard to see. One key narrative of the Coronavirus Crisis has been younger investors buying the dip, which showed a bullishness more pronounced than simply the fact that millennials have a lot of time until retirement.
Still, some investors hadn’t stuck it out through the volatility – and lost out.
“Because of the severity and swiftness of the selloff, a lot of investors sold on the way down or at the bottom" – which was technically on March 23, 2020 – "and never bought back in after the lows,” Colas said. “Sounds cliche, but I have had many, many conversations with people who panicked, missed the first 50% move back up and are still underinvested today.”
“Not rookies either,” he added. “If you didn't live through 2008, 2020 looked like the world was coming to an end.”
Brett Horowitz, a wealth manager at Evensky & Katz in Florida, said the crisis illustrated his role beyond helping clients allocate and plan. “I can think of many clients that wanted to bail out several times over the past year based on concerns of Covid, resurgence of Covid, the elections, the Georgia Senate races, and now the common worry that the stock market is too high and needs to drop,” he said.
Part of being a financial advisor over the past 12 months involved slapping clients’ hands away from the “sell” button.
“Not only did those clients who bail out lose out on possibly hundreds of thousands of dollars, but the more the market goes up, the more they want to wait so as not to compound the problem of selling low and then buying high,” said Horowitz.
Ritholtz Wealth Management's Michael Batnick told Yahoo Finance that a little tinkering isn’t a big deal, but make sure you have a framework. “You have to have a philosophy to stick to. It doesn’t mean you can’t make changes. But you have to have some sort of north star,” he said. “If that north star is 60/40 (stocks to bonds), and you got scared in February, March, and you had to go down to 40/60, fine. Not ideal, better than having no plan.”
Moves like that aren’t going to “kill your future,” he said.
But “if you went from 90% to 0% (stocks) in February and didn’t get back in last week? You can’t come back from that! Those gains you missed out on... you can’t get that back,” Batnick said.
You truly don’t know what’s going to happen
A key theme over the past year or more was that you never know what’s coming: That there would be a pandemic that would change how we live. That 20 million people would lose their jobs. That the government’s economic response would be so strong. That its public health response would be so poor. That the stock market in spite of all of the bad news would soar to all-time highs.
“If someone gave you the coronavirus data points, you would have just been on the wrong side of the trade,” said Batnick, who pointed to how Wall Street legends saw doom and gloom in the markets — rightly so at first — as retail investors piled into the dip.
“A lot of this has to do with fiscal policy, but even if you had that info, you probably would have done the wrong thing,” he said. “I didn’t see this coming. it was different this time. We’d never seen anything like this before.”
For a professional like Batnick, who admits to having thoughts more in line with the old guard, the past year had another lesson: though you can stay agile and move when necessary, let the plans you put in place do their work.
“I tend to get lost in the day to day, the hour to hour sometimes. It’s easy to do that,” he said. “But last year was another reminder to let go a little bit. I don’t mean give up and throw everything in an index, what I mean is stop micromanaging your portfolio.”
Rebalancing comes out as a huge winner
Rebalancing is a central tenet of long-term investing, but isn’t always executed consistently. No one likes to sell winners and buying stocks on their way down can be scary as well.
“We are also hoping that clients learn how valuable rebalancing can be,” Horowitz said. “We sold bonds in March of 2020 and used the proceeds to buy stocks. This allowed portfolios to recover faster and hopefully taught clients that there is absolutely a way to take advantage of low prices.”
For Batnick, the timing of a rebalance isn’t important, just the fact that it gets done periodically. The priority for him is having people not make some crazy mistake from panic.
“It’s insane to think about how it took seven days for the market to discount all the bad news, the cruises, airlines, casinos, the REITs,” he said. “If you were caught up in the news — and it’s very easy to do that — you would have chopped yourself up.”
Again, Batnick echoed the refrain of 2020: Panic can put a big hole in your future.
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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.