Here’s all you need to know. (If you’re in a rush.)
- Crash? What Crash? Believe it or not, US stocks reached new all-time highs in August and early September, just months after one of the worst stock market crashes in stock market history. This makes it the fastest bear market recovery EVER.
- A vaccine is coming soon, maybe… Several biotech companies have shown early success with their potential COVID-19 vaccines. While trials are still in relatively early stages, the stock market is clearly optimistic that at least one may get FDA approval by the end of the year.
- Stimulus stall Although the House of Representatives passed a second relief bill in May, negotiations failed to get bipartisan support in the Senate from there. Boosted unemployment benefits from the CARES Act therefore expired in August. With an election around the corner, additional relief talks are ongoing, but a deal seems unlikely, for now.
- The V-shaped (stock market) recovery Despite being DOWN over 30% in March following a crash of historic proportion, the S&P 500 finished off the 3rd Quarter in positive territory for 2020 (so far). The real economy, while showing some signs of improvement, is still a very different story.
- The President has COVID While this is still a developing story, markets largely shrugged off the initial news of President Trump contracting the coronavirus and also being hospitalized as a result. He is now out of the hospital and recovering at the White House.
- A wild ride How you feel about your investments this year likely depends heavily on exactly when and how often you’re checking performance. But for long-term investors, short-term returns will likely vary widely based on largely irrelevant factors like the start date of the timeframe you’re looking at.
And now for the long(er) version…
As the 2020 Fall arrives, it brings with it an uncomfortable chill in the air and a dense fog that the investing world has seen rolling in for some time. As shades of red and gold cover our landscape, we know Fall as a season of predictable change. But in a year that has been flooded with uncertainty and unpredictability unlike just about any in our history, investors now must brace for, and await the results of, a Presidential election that may not bring clarity for many months.
For most of the third quarter, positive news about COVID-19 treatments, promising early-stage vaccine trial results, plateauing case numbers, and falling death rates drove the market toward new all-time highs in early September. While economic data continued to show that the real economy has a long way to go toward recovery, patient investors reaped the benefits of the stock market’s forward-looking nature.
But looking back on what we’ve been through as investors so far in 2020, it’s likely that you have found yourself feeling a wide range of emotions about your investments this year, depending mainly on the timing of when you happened to check in on them.
The whole point of investing is to put your money to work for you today with the expectation that it will be worth more later on when you’ve reached your goal. When we invest for a long-term goal, we generally should have a timeframe in mind. In other words, we decide on the timing of the initial investment and then also the date in the future when that money will actually be needed for a specific reason. When investing for retirement, we’re often talking in terms of decades when we talk about this timeframe, which we also refer to as a “time horizon”.
However, as we turn our calendars each year, our brains often reset our timeframe of focus from that decades-long “journey” in front of us, to the specific new year we are in at that specific moment. When January 1st arrives, investors often think of it (whether they mean to or not) as a reset – a chance to try again or a chance to beat the returns their accounts achieved in the previous calendar year. But the reality is that this game our minds play with us is completely irrelevant and meaningless, and it actually leads investors to making some very bad investment decisions throughout each year.
Successful investing is tied far more to a strong understanding of psychology than any ability to read fancy charts, build complex spreadsheets, or say big words. This is where recognizing different kinds of tendencies and biases that live within all of us can ultimately give an investor an edge and a higher likelihood of reaching their long-term goals.
One behavioral bias that can creep up in several ways for investors, is what is known as anchoring. This is the idea that we tend to need SOMETHING to compare to, or to use as a benchmark, in order to evaluate our investment decisions, whether that be a share price, an initial investment amount, a market index, or our account balance at some arbitrary point in time, like January 1st of any calendar year. Let’s talk about that last one…
When you log into your 401k, you’re likely to see some kind of performance number displayed that is intended to show you how your account is doing. This number is most often a YTD (year-to-date) number expressed as a percentage. This is your YTD return, or the percentage your account has either grown or declined by, so far this year, since January 1st. So, why might this be problematic?
Let’s take a peek…
Take 2020 for instance. Let’s say that, like most people, you are someone that tends to log into your retirement account(s) a few times throughout the year just to check-in and see how things are going. So, for the sake of simplicity, let’s just take a look at what an investor holding 100% of their account in an S&P 500 index would have seen as that YTD return percentage on three separate, but not too distant, dates so far this year. AND what they might have been thinking at the time…
February 19, 2020 +5%
The headlines and tweets are saying the market is at new all-time highs right now and in less than two months, I’m already up 5% for the year! This is going to be a great year!
March 23, 2020: -30%
Well, this is awful…Seems like I’ve made a huge mistake. I feel like I should just sell to stop the bleeding
September 2, 2020: +11%
Good thing I stuck with it and didn’t sell back in March. I would’ve missed quite a comeback!…But wait, we’re back at all-time highs…Should I sell here?!
Keeping in mind that the start date for all three of these return percentages is exactly the same (January 1st), any investor looking at these YTD returns at these three separate moments would have felt three very different emotions about the same exact investment, without any change whatsoever to their long-term goals.
The moral of the story…
That person checking their YTD performance on March 23rd may have been down some thirty percent since the start of 2020 (less than 3 months), but still UP several hundred percent over the last ten years. So, which number tells you more about how your balance is doing?
Investing is a long game. And the only timeframe that truly matters in the end is the day you start and the day you reach your goal. Every random short-term period in between is just noise.
Now, we aren’t saying to ignore things like YTD return numbers. Reviewing your account periodically is something we all should absolutely do. What’s important though, is to always keep in mind these subconscious tendencies we each have and that the returns of any investment over any random short-term period also need additional context to remind us why they likely don’t actually mean much in the bigger picture.
The feeling you have about the performance of your account at any moment is heavily dependent on the day you decide to look and the date that the timeframe of your assessment begins. Don’t let that feeling get the best of you if you already have a proven long-term strategy in place. And if you find yourself losing sleep over your retirement accounts, it might be time to revisit your tolerance for risk altogether, to make sure your investments truly fit you and your goals. If you’re a blooom client, this is a topic we love diving into with our clients. So please reach out!
The information is provided for discussion purposes only and should not be considered as advice for your investments. Past performance is no guarantee of future results. Please consult an investment advisor before you invest.
Published on October 9, 2020