Now that vaccines are plentiful and effective, the economy is emerging from the COVID-induced recession that began a little more than a year ago. As we reflect on the past year, a few trends emerge that can serve as financial lessons for the future.
Staying the course through volatility
Many people do not like to hear “stay the course” because they are hearing it at a time when they are losing money in their investments and they have the urge to take some kind of action. The natural tendency is to want to stop the decline by selling the stocks that are going down. People often think they will get back in when things look a little better. The problem is the stock market always recovers a significant amount of the decline before things actually start to look better economically. So, people end up selling near the bottom and getting back in at much higher levels which does permanent damage to the account balances.
Investment experts typically rebalance accounts when the market is down significantly, selling bonds and buying stocks. Then, after stocks recover, we rebalance again, selling stocks and buying bonds. Rebalancing during periods of high volatility is a key strategy allowing you to capitalize on opportunities by buying investments that are low and selling investments that are high. Buy low, sell high is always good advice to follow but not always easy to do.
It is important to have an asset mix that is in-line with your risk tolerance and personal situation so you will be able to resist the impulse to sell when share prices are down and think you can sit out until things look better. If you have too much allocated to stocks at the time when a correction comes and you react by selling them off before they have a chance to recover, you will not participate when their share prices recover. This strategy will have a serious negative impact on your long-term results. It might help to work with an investment manager who can get between you and your natural urge to bail out when the going gets tough.
The power of stimulus
The federal government created a record amount of fiscal stimulus over the past year, multiple times larger than anything we have seen before. It will have a definite positive impact on economic growth this year, but it also comes at the cost of significant additional government debt. At some point, there will be an economic price to pay for the ballooning national debt, but it is difficult to know when that will happen.
In the short term, it is a definite positive for the economy. The stimulus benefits have insulated many people from being negatively impacted financially by the economic disruption caused by the pandemic. In fact, extra federal unemployment money meant that many who were unemployed because of COVID actually took home more weekly income than when they were working.
One inefficiency of the stimulus was that much of it went to people who were not negatively impacted by the pandemic, or the size of the benefit was larger than the negative impact experienced. This windfall, additional money in the hands of people who did not really depend on it, will also have a positive impact on the economy because much of the excess money received will be spent on goods and services this year.
Have respect for TINA
TINA stands for There Is No Alternative. This has been a theme in the markets for the last year. With much of the economy shut down, consumers did not have great option to spend their money, and with interest rates near zero, they earned nothing by saving it, so they might as well buy stocks. This massive influx of new investors in stocks has helped to move stock prices higher.
The economy has experienced a lot of turbulence through the pandemic and consumers have been put to the test. With the economy growing out of the recession, consumers and investors can focus on the valuable lessons learned over the past year to be equipped to weather the next storm.