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.

Whether your political views are right, left, or somewhere in between, you should check out this video. Election years tend to heighten everyone’s anxiety. This video does a great job of helping us as investors understand what to do.

As changes to tax reform, foreign policy, and social issues loom, it’s totally natural to be tempted to make short-term portfolio changes to profit from the uncertainty, or to minimize losses. But, as we know, markets are extremely efficient at processing new information and adjusting prices based on future expectations, so research would tell us any fears or expectations about the results of the presidential election are already baked in.

So, what’s a savvy investor to do? Our friends at Dimensional Funds skillfully reframe the perspective provided by the regular media.

Going back to 1928, when Herbert Hoover was elected president over Al Smith, the S&P 500 has returned on average 11.3% during election years and 9.9% in the subsequent year. In fact, there have been only three presidents in history that have seen negative returns in the stock market over their presidential tenure: Herbert Hoover during the Wall Street Crash of 1929, Franklin Roosevelt during the Great Depression, and George W. Bush in the 2000s during a time known as the Lost Decade.

Dimensional Founder and Executive Chairman, David Booth, discusses the lessons from 2019 investors can apply to 2020.

I have worked in finance for over 50 years, and it seems that every January the same thing happens. Lots of folks look back at last year’s performance to draw conclusions they can use to predict what markets will do in the year to come. I don’t make predictions, but I do think it’s worth answering this question: 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.” Amidst gloomy predictions for 2019, I posted a video on the limitations of forecasting.

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.

We all know what happened. Global equity markets finished the year up more than 25% and fixed income gained more than 8%.

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. Don’t time the market in 2020. Don’t try to figure out when to get in and when to get out—you’d have to be right twice. Instead, figure out how much of your portfolio you’re 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’re still trying to predict the future. You’ve probably heard the saying, “The definition of insanity is doing the same thing over and over again and expecting a different result.” I’ve been seeing people make this same mistake for 50 years.

We’ll never know when the best time to get into the market is because we can’t predict the future. And if you think about it, that makes sense. If the market’s doing its job, prices ought to be set at a level where you experience anxiety. It’s 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’ll find you have more time to do the stuff you love to do.

David Booth

Executive Chairman and Founder

Dimensional Fund Advisors