Improving Investor Behavior – Hindsight in 2020

They say hindsight is 20/20, and as we make the year 2020 hindsight, it’s a good time to reflect. What did we learn? What surprised us? How can we use our past to make our future bigger and better?

It was former Secretary of Defense Donald Rumsfeld, who said it’s the “unknown unknowns” that get you. Unlike a “known unknown,” something we expect but don’t quite know the outcome, an unknown unknown is something no one could have predicted. The election was a known unknown: somebody would get elected; we just weren’t sure who. The circumstances may have been unusual, but there was going to be an outcome that we could anticipate.

An unknown unknown is something like COVID-19: something that comes out of left field and creates uncertainty through its mere existence. We did not understand its nature, the impact, the contagiousness, how to treat it, who would be the most vulnerable, what the effect would be on our healthcare system or how people would react to it. Even ten months later, there is still much we don’t know.

Rarely do we see a year packed with both types of unknowns delivered in such rapid succession as we have this year. It was a “masterclass in investor behavior” as the markets plunged, recovered, pulled back, recovered, and so on. After the market fell 34% in 33 days, investors sold at the low prices for the year, only to see valuations rise over 50% in a matter of months. As it sits right now, the markets look likely to finish the year with about a 15% gain. That’s remarkable. If I had told you in December of last year that a pandemic would hit the U.S., resulting in almost 300,000 American deaths and unprecedented unemployment, would you have guessed the markets would be up?

This is why good investor behavior is so important. Looking at the data, it’s easy to conclude that we are not where we “should” be, and yet, here we are. It was a tempting year to try and time the market, either selling or buying. But those who sat on their hands did surprisingly well. Think back: Not only did we have the onset of COVID and an important election, but protests, restrictions, negotiations, and federal interventions defined the year. Each of these events tempted investors to buy or sell, and the market moves (or lack thereof) that quickly followed either buoyed or blew out investors. Those who resisted temptation and remained committed and consistent did surprisingly well and with minimal effort. It was proof that while timing the market once may be possible, doing it with any level of consistency is impossible.

I feel for those who made large investment changes to their investment portfolio driven by fear. Fear is a very dangerous and powerful emotion. We had a second lesson just before the election when the market fell 9% in mid-October, only to have one of the best days of the year right after.  No amount of study, research, newsletters, or blogs can prepare you to know what will happen tomorrow.

That’s why I won’t pretend to know what’s going to happen next year. Uncertainty is always present, and our goal as investors is not to eliminate it but learn to live with it. We should remember that one person’s fear is another’s opportunity. And above all, we need to remain consistent. If you had continued to invest throughout the year regularly, whether a little each week or each month, you would have “accidentally” caught some great buying opportunities. But if fear caused you to think, “maybe I should wait a month or two before investing some more,” you let your emotions get the better of you.

If that story sounds familiar, you aren’t alone. Nor does it make you a terrible investor. Instead, see it as an opportunity to grow. Like going to the gym, muscles that are used improve. Look back on your year and try to remember your thinking at any given point. Were you fearful? Optimistic? Uncertain? Did you react to those feelings? If so, what can you do to prevent that in the future? If that sounds like a chore, you might consider talking to an advisor. Stewarding capital is part of our job, but a much more important role is helping people manage and improve their behavior.

I do not know what 2021 has in store for us, but I will tell you that I’m optimistic. Frankly, that’s my general disposition. Yes, COVID has been a terrible unknown this year, but think about it this way: our country faced a new virus, tore it apart to understand it, headed to a lab and built a vaccine for it, and are now beginning to distribute that vaccine, all in about ten months! And in that time, our country adapted. We used old tools in new ways. We connected where and how we could, both personally and professionally. As a result, tools like Zoom point to a different future – one that maybe doesn’t involve as much travel, hassle, or headache and instead points to more time with our families, a better connection with our neighbors, and more efficiencies in how we work.  These tools aren’t new, but our changing world made them a necessity. The science, the innovation, the capabilities we have as Americans is truly mind-boggling.

There will be many “unknown unknowns” in our lifetime. Our true test is our reaction to them. Though our country remains divisive, we’ve pulled together (along with the rest of the world) to face a common enemy. If that alone doesn’t make you optimistic about our future, I don’t know what will. Happy holidays and best wishes for the new year.