Why 2020 was remarkable, yet normal
2020 was a year we will long remember for its remarkable events. We were affected by a global pandemic, a hard shut down of the economy, civil unrest, and one of the more emotionally charged elections in memory. From our investment management perspective, however, 2020 did not present anything all that unusual, with the exception of the speed at which markets declined and subsequently recovered.
…2020 did not present anything all that unusual, with the exception of the speed at which markets declined and subsequently recovered.
Market volatility was high, but volatility is normal and the road to a successful investment outcome is bumpy. Since 1926, the U.S. stock market has returned about 10% a year on average. Returns of the S&P 500 Index in any given year have ranged from as high as 54% to as low as -43%, but a return within plus or minus 2 percentage points of this 10% average in only 6 of the past 94 calendar years.
The progression of every bear market goes like this: First, there is some new development which spooks some traders. To induce buyers, they lower the price at which they will sell. Others see this, get nervous and decide they want to sell too. As more do this, the market indexes fall. At some point, traders betting on an uptick and investors seeing the low prices at which shares can be bought start to scoop up shares, causing a rise in market indexes before things look better. Eventually, as the impact of the news which started the cycle dissipates or becomes less frightening, the market fully recovers and resumes its climb to new highs.
As the above unfolds, it is easy to lose sight of the fact that markets have always recovered and the reasons for this are known. The lower the market drops, the more attention the media pays to the decline. This makes more people nervous and there is always a rash of “this time is different” concerns. Being a long-term investor is stressful during bad markets because the news which comes at us typically IS different, so it may be tempting to fall into the trap of thinking the market might not recover. This interesting graph lays out the market’s performance during some of last year’s news events. If you were nervous, anxious, or fearful during the events in 2020, you are normal. And as frightening as some of those events were, it didn’t change what we, as prudent investors, should have done.
We don’t make many predictions, but we can say with confidence another down market is coming. We don’t know when it will arrive, how far down it will go, or how long it will take to recover but rest assured, the bear will growl again. “Rest assured” may strike you as an odd word choice, but you can take some comfort in knowing that another market decline is inevitable and normal.
…bear markets and “corrections” are normal market behavior, you can ignore the warnings from the media about the next market drop.
If you hold our view that bear markets and “corrections” are normal market behavior, you can ignore the warnings from the media about the next market drop. Most of these warnings will be false and you can be confident that if the market actually does have a major decline, it should reverse. You understand that stories of people being wiped out due to a market decline exist because of poor planning, ignorance about market behavior, or speculative approaches like market timing, not the market behavior itself.
The next time the market sinks, you will remind yourself that we have you well positioned to weather a drop. You hired experienced financial planners who have served you well and with your best interests in mind. Plus, you are aware the financial media is far more likely to make you nervous than to be of any use and thus, will feel free to turn off the TV knowing we have developed a sound financial plan for you.
As long as you understand you have a sound plan, you can be confident things will work out for your family when the next down market arrives, just as it did in 2020 and just as it has every time before for a diversified, patient and disciplined investor.
News & Notes
COVID-19 Vaccine Scams: Even before the FDA approved any vaccines, vaccine-related scams were already underway. Bogus calls, emails, and mailers offering to arrange a vaccination are proliferating and in some cases, people are even knocking on doors posing as health care providers. Just as with IRS, Social Security, and law enforcement scams, never give information or money to people you do not know or who approach you. Only arrange to be vaccinated through your local government entity, hospital, or doctor.
Congratulations Ryan!: We recently got word that Ryan Osborne has satisfied all the requirements and is hereby authorized by the CFP Board to use the marks CFP® and CERTIFIED FINANCIAL PLANNER™. Ryan, who started with us in 2017, works out of our Melbourne office and is our firm’s ninth CFP® Professional.
Required Minimum Distributions are back in 2021 but will shrink in 2022: The most recent COVID-19 related stimulus bill did NOT extend 2020’s waiver of Required Minimum Distributions (RMDs) for 2021. We have already assessed and assimilated RMDs for affected clients into their planning. In addition, due to longer life expectancies, the IRS has altered the tables used for RMDs starting in 2022. This will mean smaller RMDs in 2022 than anticipated. Thus, an IRA owner who was born in 1950 will start RMDs in 2022 and under the new scale, that first RMD will be about 6.5% less than it would have been under the current scale. The new, more favorable scale applies to all taxpayers.
Please remember to call us: When anything significant happens in your life, including changes in your finances, family, or health that could affect your financial plan, please let us know so that we can adapt our planning and portfolio work for you accordingly. Also, if you ever fail to receive a monthly statement for one of the Schwab Institutional or TD Ameritrade Institutional accounts under our management, please let us know so we may assure the respective custodian delivers your statements promptly.
The Team at Moisand Fitzgerald Tamayo, LLC
Moisand Fitzgerald Tamayo, LLC is an Orlando, Tampa and Melbourne, Florida based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between. If you have any questions or would like to discuss anything further, please give us a call or send us a note. If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right. For more frequent updates, follow us on Facebook, LinkedIn, or Twitter.
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