It was tough to be optimistic about the stock market going in to 2019. We had just come out of a near bear market—a 20% drop in stock prices—when the S&P 500 dropped 2.71% on Christmas Eve 2018.
There was a partial government shutdown, a trade war with China, and a Federal Reserve that was fixed on raising interest rates throughout the new year. If you wanted reasons not to invest—you had plenty. But there’s an old saying that the stock market climbs a “wall of worries” and 2019 was no exception.
Stocks staged a massive rally starting the day after Christmas 2018 and into the new year. The DFA World Core Equity fund, a fund invested in global stocks, returned 25.47% in 2019. Investors that stayed the course were rewarded for their perseverance.
What lessons can we learn from 2019 and what’s in store for 2020?
1. Market timing is hard.
Trying to get in and out of the market to avoid losses and capture gains is difficult. There might be no better proof than 2019. The problem with market timing is twofold. You not only have to know when to get out, but you need to know when to get back in. The latter is harder than you think.
Let’s say you got jittery at the end of 2018 when the market was volatile and you decided to get out in December. You would have been happy to miss December’s selloff. Now, you decide to “wait for the dust to settle” and for “the bleeding to stop” before jumping back in. While you were waiting on the sidelines, you missed the largest single point gain ever for the Dow when the market opened the day after Christmas. The market continued its rise in January, but market experts warned that “bear markets don’t end like this” and signaled more volatility was imminent.
Fast forward to August. The yield curve had just inverted and talk of it being a recession indicator was everywhere. Sounds like a good time to get out of the market, doesn’t it?
The inversion was short-lived (most likely caused by other factors), the economy continues to expand, and stocks enjoyed a strong fourth quarter. There are always reasons to wait to invest, but history shows that’s not a good strategy.
2. Downturns are an opportunity.
The near-bear market of 2018 gave investors an opportunity to buy stocks at discounted prices. In fact, every market correction or bear market should be viewed as an opportunity to build wealth. However, in the moment, they are scary.
“Every past decline looks like an opportunity; every future decline looks like a risk.”
-Morgan Housel, “When things get wild”
Even though we know that the best time to buy is when prices are low, it’s much harder to put into practice. When all you hear and read is talking about how bad the market is doing, it’s hard to put your hard-earned money into stocks.
If you are regularly contributing to your 401(k) or IRA, stay the course and appreciate these opportunities.
3. The market is a great way to build wealth.
The market continues to give patient, long-term investors a way to build wealth. More often than not, the market has gone up. With this in mind, short-term volatility shouldn’t be viewed as something to be avoided. It’s because of this fluctuation that stocks are able to provide long-term returns. Volatility is simply the price of admission for one of the best ways to build wealth.
What’s in store for 2020?
What does the market hold for the new year? While trying to forecast returns is pointless, consider these things:
- Don’t be surprised if there is more volatility in 2020. Remember, pullbacks of 10% or more during the year are normal.
- Market highs don’t mean the end is coming. Market history is full of markets making new highs.
- The best performing asset classes in 2019 won’t necessarily be the best in 2020. Returns have a way of being random. Being diversified globally allows you to capture growth wherever it occurs.
What are your financial goals for 2020? If you want to figure out exactly where you are and how to hit your goals, a financial plan is what will get you there. Feel like you need help managing your investments so you can focus on your family and career? Schedule a time to talk with one of our advisors.
Cheers to a prosperous 2020!