When things are going right, no one questions their investment strategy. It’s more challenging to find the same level of conviction when you’re watching the market nosedive.
Your conviction was tested in 2020. If you stayed the course, you were likely rewarded. If you deviated from the plan, you probably want a mulligan.
A Tale of Two Returns
To visualize these two scenarios, I created two hypothetical portfolios. I use the S&P 500 for the stock allocation and the Barclay’s US Agg for fixed-income.
On January 1, 2020, the investor’s portfolio was 65% stock and 35% percent bonds. When the S&P 500 fell 20% within three weeks, they rebalanced their portfolio to be 35% stock and 65% percent bonds in an effort to protect their downside.
On March 23, 2020, the S&P 500 bottomed out. In both scenarios, asset allocation limited their downside, and you can begin to see deviations in their portfolio returns.
They planned to maintain their current allocation, 35% stock, and 65% bonds until ‘things got back to normal.’ At that point, they’d rebalance back to their original allocation.
Without hindsight, it’s impossible to know what back to normal means. As if navigating the market in the middle of COVID-19 wasn’t enough, they were also facing the most polarized election, maybe ever.
So they waited.
Three days after the March 23rd lows, the S&P 500 jumped 17%. By June 8, the S&P had recovered all of its losses. Their portfolio was only down 4%.
Still, they weren’t convinced the market wouldn’t retest the March lows, so they continued to wait.
By September, the S&P 500 was 61% off its low and up 12% in 2020. Then, volatility picked up in September and October as the election neared. They waited to see the results before making any changes. From election night to the end of the year, the S&P gained another 9%.
Ad-hoc changes to your investment strategy rarely pan out. Use history as a resource. The last 20-years may have been the most difficult for investors of any period in history.
But those that stayed the course were rewarded.