What are the lessons from 2019 that we can apply to 2020?
Let’s go back to where we were this time last year. The words running across CNBC’s home page were, “US stocks post worst year in a decade as the S&P 500 falls more than 6% in 2018.” The Wall Street Journal summarized the state of market affairs with this headline: “U.S. Indexes Close with Worst Yearly Losses Since 2008.”
Things felt ominous. We started the year with a lot of anxious people. Some decided to get out of the market and wait for prices to go down. They thought that after 11 years, the bull market was finally on its way out. They decided to time the market.
Global equity markets finished the year up more than 25%1 and fixed income gained more than 8%.2
Missing out on big growth has as much impact on a portfolio as losing that amount. How long does it take to make that kind of loss back? And how is someone who got out supposed to know when to get back in?
The lesson from 2019 is: The market has no memory. Do not time the market in 2020. Do not try to figure out when to get in and when to get out—you would have to be right twice. Instead, figure out how much of your portfolio you are comfortable investing in equities over the long-term so you can capture the ups and ride out the downs. A trusted professional can help you make this determination, as well as prepare you to stay invested during times of uncertainty.
Not enough “experts” subscribe to this point of view. They are still trying to predict the future. You have probably heard the saying, “The definition of insanity is doing the same thing over and over again and expecting a different result.” We have seen people make this same mistake for years.
We will never know when the best time to get into the market is because we cannot predict the future. And if you think about it, that makes sense. If the market is doing its job, prices ought to be set at a level where you experience anxiety. It is unrealistic to think the market would ever offer an obvious time to “get in.” If it did, there would be no risk and no reward.
So what should you do in 2020? Keep in mind 2019’s most important lesson (which is the same lesson from every year before): Stay a long-term investor in a broadly diversified portfolio. Reduce your anxiety by accepting the market’s inevitable ups and downs. Make sure the people advising you align with your perspective. Stop trying to time the markets, and you will find you have more time to do the stuff you love to do.
This post was prepared and first distributed by Dimensional.
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