The entire world changed in countless ways in 2020. Our investing strategy did not.

Here are 10 lessons from 2020, and for the long view, that remind all of us what didn’t change in a year filled with non-stop uncertainty. 

The principles outlined are timeless. 

 Choose an investment philosophy you can stick with for the long haul

• As Dimensional Executive Chairman and Founder David Booth says, “A philosophy serves as a compass to guide you through turbulent times. When you’ve got a compass, it doesn’t take drastic directional changes to find your way. Small adjustments are all you need to stay on course.”
• While there is no silver bullet, understanding how markets work and trusting market prices are good starting points. By adhering to a well-thought-out investment plan, ideally agreed upon in advance of periods of volatility, investors may be better able to remain calm during periods of short-term uncertainty.

Create an investment plan that aligns with your risk tolerance

• As investors, our risk appetite often changes based on the market environment we are in. In early March when we experienced the fastest bear market in history, some would have slept better at night knowing they had allocated more to bonds or cash. In April, when the market had its best monthly return since 1987¹, those same investors would have felt better knowing they were allocated more to stocks. The point being, you want to have a plan in place that gives you peace of mind regardless of short-term market swings.
• Over time, capital markets have rewarded investors who have taken a long-term perspective and remained disciplined in the face of short-term noise. By focusing on the aspects within their control (like having an appropriate asset allocation, diversifying their investments, and managing expenses, turnover, and taxes) and sticking to a long-term plan that is in line with their risk tolerance, investors may be better able to look past short-term noise and focus on investing in a systematic way that will help meet long-term goals.

Don’t try and time the market

• The 2020 market downturn offers an example of how the cycle of fear and greed can drive reactive decision making. Back in March, there was widespread agreement that COVID-19 would have a negative impact on the economy, but to what extent? Who would’ve guessed we would’ve experienced the fastest bear market in history in which it took just 16 trading days for the S&P 500 to close down 20% from a peak², only to be followed by the best 50-day rally in history?³ I would be hard-pressed to find someone who had that in their market timing forecast.
• Trying to time the market based on an article from this morning’s newspaper or a segment from financial television? It’s likely that information is already reflected in prices by the time an investor can react to it. For investors trying to time the market the odds are stacked against you, the good news is, you don’t need to be able to time markets to have a positive investment experience.

Know what’s in your portfolio

• Investors want reliable portfolios with robust risk controls, unfortunately, it often takes a market decline for many to take a closer look at what is actually in their portfolio. In times of market stress, investors rely on the fixed income portion of their allocation to serve as the ballast of their portfolio, helping to provide downside protection. Many investors learned the hard way earlier this year that what they thought were safe fixed income products, were actually stretching for yield, leading to fixed income portfolios that did not hold up during the market downturn.
• We take a transparent, low-risk approach to managing fixed income – in which we are able to pursue higher returns while staying within the guardrails of the portfolio guidelines. Our investing partners perform market-informed credit assessments, providing a more complete picture of an issuer’s credit quality in real-time, helping to ensure that your portfolio behaves in a way that is commensurate with the intended credit risk exposure.

Build flexibility into your investment process – this principle is even more crucial in times of high stress

• For many, the heightened volatility we experienced this past year adversely affected trading processes as traders were forced to demand immediacy, instead of waiting for the best value, when going to the market to trade. We choose partners who approach trading differently. Dimensional’s investment and trading process, for example, is designed to function robustly and account for high volatility, changes in available liquidity, and sharp market movements. While markets were stressed and returns were somewhat unusual, the efficacy of this approach remained true and performed as expected. The approach delivered risk management in a robust fashion, delivered outperformance across many different asset classes, provided daily liquidity to investors in our portfolios throughout the period, and added value to investors.
• What was the impact on clients? In March, Dimensional was able to buy corporate bonds for 50.7 bps cheaper than the trade prior and 21.5 bps cheaper than the trade after. When going to the market to sell bonds and provide liquidity to allow clients to rebalance into equities, we were able to sell corporate bonds for 104bps higher than the trade prior and 116bps higher for the trade after.

Stay disciplined through market highs and lows

• Financial downturns are unpleasant for all market participants. When faced with short-term noise, it is easy to lose sight of the potential long-term benefits of staying invested. While no one has a crystal ball, adopting a long-term perspective can help change how investors view market volatility

Look beyond the headlines

• Read the newspaper to be an informed citizen, not for advice on how to navigate the financial markets. Daily market news and commentary are designed to challenge your investment discipline, and not in a good way. Some messages stir anxiety about the future, while others tempt you to chase the latest investment fad. The result? You buy or sell, and Wall Street gets richer. When headlines unsettle you, consider the source and maintain a long-term perspective – growing wealth has no shortcuts.

Focus on what you can control

• To have a better investment experience, people should focus on the things they can control. It starts with HIG creating an investment plan based on market principles, informed by financial science, and tailored to a client’s specific needs and goals. Along the way, we can help focus on actions that add investment value, such as managing expenses and portfolio turnover while maintaining broad diversification. Equally important, an advisor can provide knowledge and encouragement to help investors stay disciplined through various market conditions.

With 2020 coming to an end, we thought it would be a good time to remind everyone of a few tax planning strategies that can be easily overlooked:

1. Maximize your 401(K) or other employer plan contributions – Saving funds on a pre-tax basis in a retirement account allows them to grow tax-deferred until they are withdrawn in retirement.
2. Contribute to your Health Savings Account (HSA) – An HSA is an often overlooked savings vehicle that allows individuals covered by high-deductible health insurance plans to save money on a pre-tax basis. The funds then grow tax-deferred and if used for medical expenses can be withdrawn tax-free. These are sometimes called the triple tax advantages of an HSA.
3. Get going on 529 contributions – If you have children (or grandchildren, nieces, nephews, or anyone that may attend school in the future), a 529 may be the right savings vehicle for you. The tax deductibility of these contributions depends on your state of residence, and any contributions grow tax-free so long as they are used for qualified education expenses.
4. Contribute to a cause you care about – If you don’t have a charitable organization that you want to support directly in 2020, you can open a Donor Advised Fund to make the charitable contribution this year, allowing you to gift to your favorite charitable organization later. You receive the tax deduction in the year of contribution to the Donor Fund, and this also allows your funds to stay invested, and potentially grow, so that you can give away greater amounts in the future.
5. Think about financial gifts to individuals – While gifts to individuals are not tax deductible, they are a great way to lower your overall estate and reduce the amount that is potentially subject to estate taxes in the future. Cumulative gifts to an individual up to $15,000 [$30,000 for a married couple filing jointly in 2020] are under the annual gift exclusion and do not require a gift tax return to be filed. If you give more than $15,000 to one person, you may have to file a gift tax return and would encourage you to consult with your tax professional.

For some individuals it makes sense to accelerate their tax deductions in 2020, and for others it may make sense to delay their deductions until 2021. One of the things we do at Hill Investment Group is work with our clients’ clients’ CPAs and estate attorneys to ensure they are maximizing not only their portfolio with us, but their complete financial picture. Feel free to give us a call to discuss.

One question we hear often is, how do I teach my kids about money?

We’ve shared our conversation with Marilyn Wechter about subtle ways to set our kids up for success with money and talked about how not to be a snowplow parent, but what about the nuts-and-bolts? How can we teach our kids the basics of saving, the power of compound interest, and how capital markets work? In other words, how do we make finance fun?

Recently, John and I had a crash course in teaching a trio of teenagers. We thought we’d share some valuable takeaways you can incorporate into your own “money talk” with your kids. 

The meeting’s highlight was “Roll with the Market”, a dice game that aimed to replicate the stock market. We also introduced them to our version of Finance 101: budgeting, savings, goals, credit cards, and Rick Hill’s favorite Rule of 72.

In “Roll with the Market”, the kids decided if their money was “in” or “out” through 10 rounds of dice rolls. The game gave the kids a taste of what it’s like to be invested in the stock market, simulating a rising or falling market’s emotional effects and changes to their investments. To our surprise and satisfaction, the three kids stayed in the market all 10 rounds, never once deciding to sit out (equivalent to going to all cash). Even at this young age, they were able to intuitively understand and take the long view!

Here are a couple of tips for keeping children engaged as they learn:

• Use cold hard cash – Once we threw some cash on the table and got them involved in helping manage it, they were hooked. 
• Gameify the essential topics – Making the lesson a game reframed their idea of money from obscure to practical and made it fun! They were also able to practice and absorb the lessons without just listening to us drone on. 
• Make it relevant – We believe the real power of wealth lies in creating freedom and options to lead the life you choose. By asking a couple of pointed questions, we were able to help them understand that money can power their dreams, even now. The key was showing them money matters today – not just in the future. Each member of the family was totally engaged, asking great questions, participating in thoughtful conversation.

If the idea expressed here sounds good to you, let us take “the money talk” off your hands. Contact us about scheduling a family meeting. You never know what small spark will set off your child’s long-term success with money.