Money and Investment Lessons of 2020

How to plan for things you can't plan

Christine Benz 4 January, 2021 | 4:38AM
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Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. The year 2020 was unprecedented on many fronts, featuring a global pandemic, a brief bear market, and a presidential election. Joining me today to discuss some key lessons from this unusual year is Christine Benz. Christine is Morningstar's director of personal finance.

Hi, Christine. Nice to see you today.

Christine Benz: Hi, Susan. Great to be here.

Dziubinski: Now, it's unlikely that a global pandemic was on the radar of most investors coming into 2020. And is a lesson from that that it can sometimes be very difficult to figure out all the risks to guard against?

Benz: I think that is a good lesson, Susan, because I try to think back to what we were thinking about in January and February of last year before the pandemic surfaced. We may have been worried about high equity valuations, low bond yields, maybe election-related volatility. No one was talking about a pandemic, really. And yet, that's what we had. And so, I think the message is not to think about specific risk factors that could hurt your portfolio, but just know that periodically we see big market downdrafts, and that necessitates that you have the ability to hang on if you have stocks in your portfolio through those periods of weakness and that you have the psychological wherewithal to hang on through those periods. So, I think that's the key message. Don't worry about the specific risk factor, just guard your portfolio against these periodic shocks because we just have them from time to time.

Dziubinski: And speaking of shocks, we did endure quite a bear market that we've since bounced back from. Is another lesson for investors to really keep in mind of trying to sit tight when those bad downdrafts come?

Benz: Yes, definitely. I think the brief bear market that we had, just like the five-month bear market, the shortest in S&P history, was a really good one from the standpoint of teaching investors about the importance of sitting tight. If you had sold everything during those darkest of days in March, you would have really locked in losses that you didn't have to. Of course, what we know from market history is typically these downdrafts do last longer. They don't just last month. They oftentimes last years. So, you need to be prepared to sit through longer market downturns but definitely sit tight. Make sure that you aren't turning paper losses into actual losses if you can possibly prevent it.

Dziubinski: And another lesson from that downdraft period could be that there's really no substitute for cash, is there?

Benz: Right, that was a really good illustration during the February-March period where we saw almost everything fall. Even bonds, even high-quality bonds, for a brief period of time seemed to be falling in sympathy with stocks, and it's hard to say what the specific reason was for that, but my guess is that some investors who didn't belong in bonds but instead belonged in cash were liquidating their bonds in search of cash during that period. I do think that, especially given how low yields are, that period illustrated the risk of reaching for yield, even if you can maybe pick up a slightly higher yield by being in bonds. Don't do it if you have investments where you need that immediate liquidity.

Dziubinski: And as we've mentioned, stocks have really come back tremendously since the bear market. But the economy still isn't doing that well. What's the takeaway or lesson from that?

Benz: A great takeaway from that, Susan, is that the market is usually early. It's usually looking ahead. We've had equity market participants looking into the future, looking to better days when the vaccine is taken hold, where the pandemic is at bay and where business is at least somewhat back to normal. And that's a very typical pattern where we see the equity market recover before the actual economy does. And so, I think it's a good reminder that if you sit around and wait to see clear signs that the economy is recovering, oftentimes you will be too late. And my guess is that that will be the case this time around as well.

Dziubinski: And then, lastly, people endured job losses in 2020 due to the pandemic, losses to income due to the pandemic. Is there a lesson here about the importance of having an emergency fund?

Benz: Absolutely. One thing we see when we look at research about whether people hold emergency reserves is that they really struggle with this, and it cuts across income bands. It's not necessarily low-income workers, although it's certainly a bigger issue for them. Higher-income folks also struggle amassing three months' worth of living expenses in liquid reserves. So, I think the pandemic was a really good reminder to make sure that you've got yourself a cushion.

Of course, we've had many workers who have been protected from this downdraft, where they've been able to work and continue to earn their paychecks. But we have a lot of business owners, a lot of people who work in businesses that are quite sensitive to what has gone on here in the economy. They have been dealt a really bad blow. So, I think it illustrates the importance of holding those reserves. And then, rightsizing your liquid reserves to your situation. So, higher-income workers will want to have more of a cushion because it typically takes longer to replace those jobs, more specialized workers, certainly. Older workers, unfortunately, in periods of market weakness, of economic weakness, it's typically taken them longer to replace their jobs. I would like to see folks in that position holding more like a year's worth of liquid reserves in true cash investments to tide them through perhaps a sustained job loss if it occurs in the future.

Dziubinski: Christine, thank you so much for helping us review 2020 today. Thank you for all of your insights throughout 2020, and I look forward to talking to you more in 2021.

Benz: Thank you so much, Susan. I look forward to talking to you next year, too.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.

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About Author

Christine Benz

Christine Benz  Christine Benz is Morningstar's director of personal finance and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances and the Morningstar Guide to Mutual Funds: 5-Star Strategies for Success. Follow Christine on Twitter: @christine_benz.

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