It's an understatement to say that a lot happened in 2020. That makes this December an especially important time to think back to the investment decisions we made and why they did, or didn't, work.
It's easy to see which stocks have produced the best returns this year, but it's not as easy to remember what may have been weighing on your mind at the time the real decisions needed to be made. So as we engage in some year-end self-reflection, let's think of the one thing successful investors did in 2020 -- a strategy that has long been tested and proven to work.
Remember how March felt?
The situation at the start of the pandemic was scary. One thing that stock markets don't like is uncertainty, and there was plenty of that in March. The start of a global pandemic was compounded by a market down more than 30% in record time. There were questions about the survival of some industries, a potential credit crisis, commercial real estate loans, and a global economic depression. That's scary stuff when you're in the midst of it and you don't know how it will end.
Avoiding acting in panic is key when it comes to protecting wealth that has taken years to build. For that, one needs to have perspective. In the last 20 years, we've had the dot-com bubble burst, 9/11, the Great Recession, and the short-lived bear market in December 2018.
But if we take a look at the S&P 500 chart for the past 20 years, returns on money that was left in the market in panic times were restored in a reasonable amount of time.
It's noteworthy that the market corrections of 2013 and 2016 are barely even noticeable in the graph above.
How to build meaningful wealth
Trying to time a recovery by selling before a drop with a plan to buy back at the bottom isn't a realistic strategy. But holding on to established, proven companies -- even when things looks bleak -- and adding to those holdings along the way is what springboards a portfolio's returns.
Consider a company like Walt Disney, which was effectively closing down its entire business with theme parks, cruises, movies, and professional sports all being forced to suspend operations. And look at other blue-chip companies like Mastercard, Coca-Cola, or Home Depot that have weathered other crises.
These stocks had dramatic drops of between 30% and 40% as the bear market developed.
Even if you were too nervous to add funds during the March crash, staying invested throughout the year has paid off. Adding to these established businesses on the way down, near the bottom, or during the rebound all would have improved returns for the year.
Lesson to remember
The one thing the best investors did this year was keep investing. Some people may not have the temperament to make buying decisions in the heat of a crisis. If that's the case, putting investing on autopilot is a good approach. That could be in the form of regular deposits in a 401(k) plan, a dividend reinvestment plan, or soliciting the help of a financial advisor.
There's no reason to get fancy and try to time markets, or look for the next big thing with a large portion of your portfolio. While it's fine to have an appropriately sized amount for riskier investments, 2020 has again shown that the path to long-term wealth creation is to avoid panic, and to invest through the ups and -- especially -- downs.