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This Was My Single Worst Investment in 2020

By Sean Williams - Dec 30, 2020 at 7:21AM

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A Fool and 100% of his money in this security were parted.

Perspective has a lot to do with how investors view this year. You're either thrilled to see 2020 come to a close, or you're sad to see such an impressive year for high-growth stocks end.

The benchmark S&P 500 ( ^GSPC 1.32% ) fell by more than a third in a matter of weeks during the first quarter. It now looks on track to finish the year higher by about 15%. That's well above its 8.6% average annual return over the trailing 40-year period.

In March, I used the stock market's fire sale as an opportunity to open positions in around a dozen new companies and add to a handful of existing positions. These positions have mostly increased in value since my initial purchases.

But not everything went according to plan. One of my investments tallied an unsightly 100% loss in 2020. Worse yet, this isn't the first time this security has come between this Fool and his money. 

A one hundred dollar bill on fire atop a lit stove burner.

Image source: Getty Images.

A bet against the U.S. economy turned out poorly

With the S&P 500 roaring back from an intraday low of less than 2,200 to roughly reclaim the 3,000 level in just two months, I decided to roll the dice by purchasing a very in-the-money SPDR S&P 500 ETF Trust ( SPY 1.23% ) put. More specifically, I bought a single put for September with a $330 strike price. At the time of the purchase, this put had $28 in intrinsic value and about $6 worth of premium.

My thinking was simple: Investors hadn't fully realized the bad news surrounding the coronavirus disease 2019 (COVID-19) pandemic. As of late May, researchers were still in the process of understanding how COVID-19 was transmitted and what sort of mortality rate was associated with this illness.

What's more, the unemployment rate was one month removed from a multi-decade high. Even with the federal government passing the $2.2 trillion CARES Act, I was highly skeptical that businesses and consumers would make good on their outstanding debts. In other words, I was expecting a dose of reality to knock financial stocks on their behind and drag the broader market down with them.

That didn't happen. Rather than admit defeat, I added to my existing position by purchasing two additional contracts in early August at a quarter of the price I paid for the original contract. This effectively halved my cost basis. I figured I couldn't possibly be wrong, especially with another eight weeks to go prior to expiration.

When the options contract expired on Sept. 30, the S&P 500 had ultimately moved 400 points in the direction I didn't want it to go, and my contracts expired worthless.

Silver dice that say buy and sell rolling atop a digital screen with stock charts and volume data.

Image source: Getty Images.

Timing the market rarely works

This was not the first time I've bought an SPDR S&P 500 ETF put and watched my investment evaporate into thin air. It does, however, bring three important points to light.

First, the U.S. economy and stock market aren't tied at the hip. When I'd made my initial purchase, the U.S. unemployment rate for May was 13%. There was also no cohesive message coming out of Washington, D.C., regarding the COVID-19 response. It was unclear how long coronavirus vaccines would take to develop. For all intents and purposes, the U.S. economy looked awful. Yet the S&P 500 kept rising.

The market is always forward-looking. In each of the previous bear markets, the S&P 500 bottomed many months before the U.S. economy found its trough. I simply overlooked this very common bear market disconnect.

Second, while options can be excellent investing tools, they're also quite risky -- especially if you aren't hedging, which was true in my case. The options bet I'd made was not only contingent on the S&P 500 declining, but also on having this occur in a relatively short time frame.

A businessman holding a stopwatch behind an ascending stack of coins.

Image source: Getty Images.

Third and finally, it was yet another great reminder that trying to time the market is often futile. Although the benchmark S&P 500 has undergone 38 corrections of at least 10% since the beginning of 1950, it's impossible to predict when these corrections will occur, how long they'll last, how steep the decline will be, and what ultimately causes them.

Additionally, betting against the market has historically not been a smart idea. The S&P 500 has delivered a positive total return (including dividends paid) in 38 of the past 46 years. Also, at no point over the past century has the S&P 500 produced a negative 20-year rolling return. With operating earnings growth driving the market higher over time, betting against the S&P 500's tracking index (the SPDR S&P 500 ETF) is akin to trying your luck at the roulette table -- i.e., the casino game with the least favorable odds of winning.

Here's to 2020 being the last year I'll ever dabble with SPDR S&P 500 ETF puts.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

SPDR S&P 500 ETF Trust Stock Quote
SPDR S&P 500 ETF Trust
$464.60 (1.23%) $5.63
S&P 500 Index - Price Return (USD) Stock Quote
S&P 500 Index - Price Return (USD)
$4,655.27 (1.32%) $60.65

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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