What 2020 taught me…
What a year! I believe that many of us have been rife with emotion for many months. It changed our perspective on many things and has made us focus on what we can control.
When reviewing financial planning, those that have been more prepared have faired far better than those that were not. However, when I review all those “planning tips” over the years, which ones really made a difference.
1) Have 3 months' rainy day fund saved, to get you through the hard times. For years many people have scoffed at that because line of credits, credit cards, etc. can all provide that buffer, because what could happen? Well, the rush for cash was real back in March, and the fear of the unknown stayed with us for a few months, and that 3-month buffer was a godsend for many. We never know what might happen, but things do. An emergency fund is for exactly that, an emergency. We never know what it might be, so hence it’s called an emergency.
2) Your portfolio should be invested for the long-term, not the short term. While markets can be volatile and 2020 proved this in spades, it can respond far quicker than most of us can react. And far quicker than our guts allow us to believe. Therefore, having a plan and sticking with it should be the plan! If your situation changed, then making some accommodations for that made sense. If it didn’t and you decided to sell, in most cases, things did not work out so well. Our emotions are affected by headlines, but while they were right for the moment, they were not right for the quarter or the year.
3) Short-term money should be invested for the short-term. Similar to # 2, if you did need the money in 60-90 days, the market did not cooperate, and the stress of trying to keep what you invested could have been huge. Markets are irrational in the short-term and March proved this again.
4) Re-balancing makes sense, especially when we have big swings. Even if we don’t know what’s happening, buying low makes sense if you have a 3 yr window. Companies whose prospects didn’t change dropped 40% in 2 weeks. That isn’t logical.
5) Money doesn’t grow on trees. But it’s also not everything. Many learned that a budget is easy to manage when there is nowhere to go, and your vacation is cancelled. We started to really appreciate time with friends, and a slower pace of life.
6) Lasts year's ideas won’t be the best ideas this year. Things always change, while people expected technology was progressing, nobody expected some industries to become almost non-existent overnight. Travel and the oil & gas industry have suffered tremendously. Technology that catered to a home-based work environment experienced 5 years of growth in 6 months. And we adapted. What will 2021 bring? Different stories will be the highlights. Don’t expect the same.
7) Economic realities are hard to predict. In 2020, many expected the real estate market to fall off, and the stock market to suffer far greater and longer than it did. Why is the experience so different than what has happened so far? Well, in fact, the economy and the stock market are not as similar as we like to think. While there is a lot of overlap, many industries are not represented on the stock market. See the chart below that highlights the U.S. GDP, job creators and stock market representation. They are not all aligned. This is why what happens on the market isn’t what you believe will happen.
Last, we must recognize that our community matters! We must all do what we can to support it and the local businesses there. The Amazon’s of the world are enticing and make some things easier, but they do not support your kid’s hockey team or donate to your local food bank.
So, take a deep breath, and recognize that sticking with the plan is probably the best move. Small fine-tuning is best because sometimes doing nothing is the best course of action.
Most importantly, I hope you are able to have more of what you enjoy in this coming year. We will keep supporting the best financial decisions for you, so you can focus on what makes you happy!
