INVESTMENT LESSONS FROM THE PANDEMIC
With 2020 barely in the rearview mirror and the headlines thus far in early 2021 feeling similar to last year’s COVID-driven challenges, investors may find themselves scratching their heads wondering why the stock market continues to establish new highs and what they should do in the face of this. How do you protect yourself from the potential for renewed market volatility? Will the rollout of the vaccines push the market even higher or are companies over-valued and due for a correction?
The stock market, as a forward-looking entity, is looking past COVID to a time, hopefully in the nottoo- distant future, when the set of recently approved vaccines have been widely administered, and herd immunity has been achieved. In other words, the stock market is refocusing on the trends that will dominate when life starts to look normal again.
Despite its generally upward trajectory recently, this is not to say that the stock market will continue to increase uninterrupted and without periodic corrections.
On the contrary, the market valuations will continue to be unpredictable in the short-term — in fact, there has been an average annual intra-year correction of approximately 14% since 1980. Yet, in spite of this “volatility,” the S&P 500 has increased from 108 at the beginning of 1980 to 3,756 at the end of 2020. So, what can you do to set yourself up for success with your investments in the face of continued uncertainty surrounding the ongoing effects of the pandemic?
The short answer is to remember that the stock market is forward-looking, and you should remain disciplined, diversified, and focused on quality and income. This logic applies pre-pandemic, post-pandemic, and right now.
1. Stay Disciplined. When headlines are predicting challenging times ahead and/or stocks are selling off, people think they need to do something, anything. Stay disciplined in your approach and avoid the temptation to try to time the market. As famed investor, Peter Lynch, pointed out, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
2. Be Diversified. A diversified portfolio that is spread across the different sectors that make up the stock market – technology, health care, industrials, utilities, to name a few – can help you navigate through different market environments. Another important aspect of diversification is not putting all your eggs in one or a few companies – a good rule of thumb is to have not more than 5% of your portfolio in any individual stock.
3. Focus on Quality and Income. A diversified portfolio of high quality, dividend-paying equities, can enable you to weather volatility while also providing income to fund your spending needs. High-quality companies tend to have strong balance sheets and prolonged track records of earnings growth and often pay a healthy and growing dividend.
Regardless of current headlines, the vaccine rollout, or whatever tumultuous events may be occurring, doing these three things should help you maintain a sense of “calm amidst the storm,” so to speak, so you can continue making progress towards achieving your long-term financial goals.
Mick Kuehn is a Senior Equity Analyst for Verity Investment Partners.