The Covid-19 bear market ended just over a year ago, on March 23, 2020. Needless to say, the twelve months that followed delivered no shortage of economic and political twists and turns. But for equity investors who kept a steady hand and a long-term mindset, it also delivered a +75% return on the S&P 500 (from March 23, 2020 to March 23, 2021).1
Reflecting on the last twelve months, I find it useful to think about lessons and takeaways we can learn from, so we can apply them to our investment approach going forward. Here are my top three.
Lesson #1: Work with a Trusted Advisor to Help Keep You on Track
The world was awash in uncertainty this time last year, and no one knew what the future would hold. Markets were frazzled, folks were scared, and no one really understood any details about the nature of the pandemic. But it was also as important as ever, in my view, to stay invested and keep a steady hand.
It helps to have a trusted advisor who communicates frequently and clearly. At Zacks, we publish over 300 individual investment thought-leadership communications, so we can stay in touch with our readers and provide constant insights into our decision-making process.
Even with frequent communication, some investors still want to make adjustments during uncertain times, for peace of mind. We get that. That’s why we offer a flexible range of investment solutions to give you more control, instead of simply offering you a sleeve of portfolios based only on your risk tolerance. Not only do we give investors options, but we also offer the ability to customize portfolios to include or exclude specific industries.
Finally, it helps investors to know that decisions are being made using a trusted source of investment research, in our case Zacks Investment Research. Having a robust decision-making process guided by research is critical during a time when it’s easy to give into subjectivity.
Lesson #2: Diversification Will Help You Capture Short-Term Trends
Once the rally off the bear market bottom gained steam, many investors were scrambling to invest in growth trends – eCommerce, remote work, digital everything – hoping to capture some of the uptrends. Then later in the fall, the hot trade was favoring value over growth. After that, it was small over large.
My point here is that leadership changes hands often and quickly in the equity markets, and investors who try to rotate over and over will often latch onto a trend too late – after many of the gains have already been priced-in.
As many long-time readers know, I do not advocate short-term market timing, and I definitely do not advocate chasing trends and shifting your asset allocation based on market speculation. That’s where diversification comes in – by owning a diversified set of stocks across sector, region, style, and size, you do not need to worry about shifting your portfolio around to capture the latest outperformer. A diversified portfolio will likely already have exposure to it.
Lesson #3: Keep Steely Nerves During a Crisis
I already mentioned keeping steely nerves during a crisis, but it’s so important that it’s worth referencing again. Stocks fell -34% from February 12 to March 23 – a record sharp drop that accompanied a very scary time. Many investors fled the market.
We know today that selling stocks on the way down was a wrong decision. The market’s rally off the bottom continues today and has been among the strongest in history. But we’ve seen this time and again throughout history – since World War II, there have been six bear markets over
-30%, and every single time the S&P 500 index rallied strongly off the bottom, with an average return of +40%.
The potentially good news for investors: the second year of the bull market is also strong historically, up an average of +16.9%. Keep your steady hand.
Bottom Line for Investors
The past year has been extraordinary, but not necessarily in a good way. There are many lessons within politics, economics, and public health that we are still learning and will continue learning for years. When it comes to investing, there are many lessons we can take away from the past year, but I think the three above mattered most and can be applied over the long term.