It was exactly four weeks ago which marked the one year anniversary since equity markets bottomed. Not only did the magnitude and speed of the decline scare all the kids away, the speed at which the market turned was like nothing we've seen before.
In fact, the stock market gained a remarkable 74.8%, which I believe is the largest one year gain since 1936. Market declines such as the one we witnessed typically unfold over a longer period of time, and so too do the gains. However, this one was special. Both the decline and gain this time around didn't waste any time - a record in both speed and magnitude.
When we witness such events it's really important to put things into perspective. In today's chart we look at stock market returns both from when the market bottomed to date, and from the market top in February of 2020 to date.
The chart shows a massive 86.8% return in stocks from the bottom. Yet when you expand the time frame include the previous peak in February of 2020, although strong, relatively speaking a mere 23.4%.
I'm actually wondering whether or not COVID-19 even ended the previous bull market. As a bonus, here's another chart showing the stock market's return since the bottom of the GFC - I mean look at this thing, it's up almost 300%.
It feels like what we're seeing and going through now is not only a catch up from the COVID decline, but also a continuation from the previous bull market. One thing you need to understand is that when your investment is down 35%, it's not a 35% increase that is going to get you back to where you started, rather, a 54% increase to just breakeven.
Market pundits didn't even get a chance to respond to what hit them, and maybe that's a good thing. It probably stopped millions of investors from making what could have been one of the worst financial decisions they may have made in their lifetimes - pulling the pin and selling out at precisely the wrong time.
If you had a strategic game plan during this time, you were probably buying stocks - counter intuitive, I know. But hear me out. There's this thing called re-balancing. You start with a strategic investment mix, that is, a certain amount in stocks, say 60%, and a certain amount in bonds, say 40% - so in the end you have a 60/40 portfolio. Naturally as stocks rise, your allocation to stocks rise, and your 60/40 portfolio strays to, lets say a 65/35 portfolio. This isn't a big deal, in fact, academic research shows such a stray is okay, and it's even got a name for it - momentum. It's said even up to +/-10% is okay. But once you have large movements such as the one we had, and your allocation shifts from 60/40 to 40/60 (almost the other way around), and this is when the market separates the good from the best.
Counter intuitive instincts kick in - what you see as danger, the best see as an opportunity, when you see further losses, the best see gains, when your heart beats with fear, the best smile with greed, and when you follow the crowd out the doors, the best are zipping past you in the other direction.
People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game. - Peter Lynch
If 2020 didn't teach you a thing or two about financial markets and investing, you're going to have an expensive education. Understand the game before you run onto the pitch. Investing is easy. You make it difficult.