Lessons to Learn from the 2020 Stock Market Decline
In 2020, the US stock market took about a 30% dive in 22 days, followed by a rapid recovery. What lessons can we all learn from the 30% decline?
1. The stock market is volatile.
Since 2009, the stock market has quadrupled in value. This has given many investors the impression that the stock market does nothing but go up. Those of us with more grey hair (or less hair, in my case) have invested during market declines and know that what goes up can also come down.
Here is a telling chart that shows you the volatility of a portfolio constructed of various portions of stocks and bonds (Source: Vanguard.com):
| Stock/Bond Ratio | Maximum 1 Year Decline | Maximum 1 Year Increase |
| 100% Bonds | -8% | +32% |
| 80% Bonds/20% Stocks | -10% | +30% |
| 50% Stocks/50% Bonds | -23% | +32% |
| 80% Stocks/20% Bonds | -35% | +45% |
| 100% Stocks | -43% | +54% |
All investors need to take a hard look at this. Notice that a 100% stock portfolio has dropped as much as 43% in a year. In other words, the 30% drop wasn’t as bad as it could have been.
2. Everyone needs a plan they can stick to during market declines.
One of the biggest mistakes investors can make is to sell low. For this reason, you need a financial plan that you can stick to during market declines.
For example, my current overall target asset allocation is 80% stocks and 20% bonds. This is based on my own risk tolerance and retirement time-frame, and I know I can stick to it.
What did I do during the stock market decline? I purchased more stocks. Why? It had nothing to do with the decline, and everything to do with my plan.
When it was time to invest, I took a look at my desired asset allocation of 80/20. I saw that I had less than 80% in stocks, so I purchased more. It was that simple.
Everyone needs a written personal financial plan so that when the seas get rough, you don’t bail out. You stick to your plan. My plan was 80% stocks and 20% bonds, and I stuck to it.
What is your plan?
3. Regularly re-assess your own personal risk tolerance.
We’ve established that a 30% stock market decline is something that we should expect. In fact, it could be much worse.
It is time for some serious introspection. How did a 30% decline make you feel? Did you sell stocks low? Did you seriously contemplate it?
Me? As I already discussed, I just marched on with my plan, which is what I’d encourage you to do, but everyone is different.
If the decline spooked you, you need to reassess your personal risk tolerance. My favorite way is to take the Vanguard survey. There are other ways, though. It could be a conversation with your financial planner. It could be sitting down with your significant other and carefully examining the chart above and talking about it. It could be by getting a second opinion on your plan.
Whatever it is, you need to do it. For me, it is something I do on an annual basis.
The Bottom Line
Here are the three lessons we all need to learn from the 2020 30% market decline:
- The stock market is volatile.
- Everyone needs a plan they can stick to during market declines.
- Regularly re-assess your own personal risk tolerance.
Updated Deadline for Walter Reed Director Positions and Addition of Ft. Belvoir Positions
The deadline was updated to NLT 29 NOV 2020 for the Walter Reed positions. In addition, here are some at Ft. Belvoir, also due by 29 NOV:
Anyone applying needs to have PERS/Detailer clearance to do so.
2 Military.com Articles About Changes to the Military Due to the Recent Election
Here are 2 articles:
Cap Alternative Investments
Jonathan Clements was a longtime personal finance columnist for The Wall Street Journal, and he offers great advice at the best price you can get (free) on his blog Humble Dollar. Here is one piece of advice from his site:
“CAP ALTERNATIVE INVESTMENTS. How much do you have in alternative investments—everything from gold to commodities to hedge funds? As a rule, keep your allocation to 10% or less of your total portfolio’s value, and favor simpler, less expensive options, such as funds that focus on gold stocks and on real estate investment trusts.”
As you may or may not know, you cannot invest in any alternative investments in the Thrift Savings Plan (TSP). When it comes to using alternative investments in other portions of your investing portfolio outside of the TSP, there are really two separate questions…
Do You NEED to Invest in Alternatives?
BLUF – No
I get this answer from my favorite investment company outside the TSP…Vanguard. In this article about alternatives, they say:
For most investors, a portfolio of stocks and bonds provides plenty of diversification. Only the most sophisticated investors should consider alternative options.
The answer to this question is no. You do not NEED to invest in alternatives. Globally diversified stocks and bonds are enough, and that is what I do because I prefer a simple life. I do not invest in alternatives.
SHOULD You Invest in Alternatives?
BLUF – The answer to this question is very individual. It really is up to you.
While I don’t invest in alternatives, I’ve certainly thought about it a lot. Although at times I’ve been tempted to do it, I’ve avoided the temptation thus far. Some additional sources to consider when trying to answer this question include:
White Coat Investor Alternative Investments Podcast
Humble Dollar Guide – Alternative Investments
This message string on the Bogleheads Forum
A great book on alternative investments – The Only Guide to Alternative Investments You’ll Ever Need: The Good, the Flawed, the Bad, and the Ugly (Bloomberg) – which happens to be on my bookshelf.
Military Times – Yoga pants are now allowed at the commissary, and there was much rejoicing
Here’s a link to the article about a recent SECDEF memo authorizing PT gear at exchanges and commissaries:
Yoga pants are now allowed at the commissary, and there was much rejoicing
Finance Friday Articles
Here are this week’s articles:
Throwback Thursday Classic Post – Electronic Submission of Letters to the Board Now Available
From Navy Personnel Command Public Affairs
MILLINGTON, Tenn. (NNS) — The Navy has announced a new online capability that allows board-eligible Sailors to submit letters to the board (LTBs) electronically, Sept. 27.
Announced in NAVADMIN 220/19, the Electronic Submission of Selection Board Documents (ESSBD), is a MyNavy HR transformation and Sailor 2025 initiative designed to improve personnel programs and give Sailors more control and ownership over their careers. ESSBD improves the speed, transparency and confidence of receipt over current submission methods.
The application allows board candidates the ability to submit pre-formatted LTBs, with or without attachments. Additionally, board candidates are able to view the exact product that will be delivered to the board. Previous submission methods (U.S. Postal Service, e-mail, etc.) will remain, but ESSBD will become the preferred LTB submission method.
ESSBD will be available for limited use by administrative boards through the remainder of calendar year 2019. For a list of eligible boards (none of which appear to be medical to me – JMS) and their convening dates, consult NAVADMIN 220/19. Beginning Jan. 1, 2020, ESSBD will be available for all promotion, advancement and selection boards.
ESSBD is currently available for submissions of LTBs only. Submissions to application-driven boards and programs, such as Limited Duty Officer/Chief Warrant Officer (LDO/CWO), Lateral Transfer, educational programs, etc. will not be submitted via ESSBD. Sailors should continue to use the submission guidance contained in the specific NAVADMINs for these programs.
To use ESSBD, candidates must access document services through MNP at https://www.mnp.navy.mil/group/my-record. Submitters should have all information, with attachments (if applicable), prior to beginning this process, as there is currently no “save-and-return” function between BOL sessions. Submitters will receive an email confirmation of receipt. Submission and subsequent receipt acknowledgement for letters submitted via ESSBD, or other means, does not constitute confirmation of board eligibility.
For more information or questions related to ESSBD and ESSBD submissions, consult NAVADMIN 220/19 or contact the MyNavy Career Center (MNCC) by calling (833)-330-6622, or via DSN at 882-6622.
Asset Allocation
Jonathan Clements was a longtime personal finance columnist for The Wall Street Journal, and he offers great advice at the best price you can get (free) on his blog Humble Dollar. Here is one piece of advice from his site:
“ASSET ALLOCATION. This is a portfolio’s split between the four asset classes: stocks, bonds, cash investments like savings accounts and money market funds, and alternative investments like gold, real estate and hedge funds. It’s arguably the most important decision an investor makes. The more a portfolio has in stocks, the greater its volatility—but the higher its expected return.”
Like Jonathan mentions above, this is arguably the most important decision you make. Once you make the decision, it solves many of your investing dilemmas.
For example, many people think that the stock market is an overvalued bubble about to burst. What do you do at the end of this month when you are looking to invest some money? You look at your desired asset allocation and invest in whatever is underweighted. If nothing is underweighted, you invest in them proportionally and consistent with your asset allocation. If your desired allocation is 80% stocks and 20% bonds, you invest 80% in stocks and 20% in bonds.
The bubble bursts tomorrow and it’s the end of the month. What do you do? Again, you look at your desired asset allocation and invest in whatever is underweighted (likely stocks).
Picking an appropriate asset allocation and sticking to it simplifies your financial life and solves mental dilemmas.
If you want some help, here’s my take on how to select an appropriate asset allocation. You can also find a discussion about it in our 6th step to financial security – Invest in Stock and Bond Index Funds or ETFs.
Joel Schofer's Career Planning Blog 