2020 Market Drop Reinforces Valuable Lessons

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After I updated the poster “The History of Market Ups and Downs” with data through 2021 (available to clients directly and other advisors at www.interactfa.com) and looked at the “blip” that was the market decline in early 2020, I couldn’t help but consider how positive it was for Equius clients. No, we didn’t “short” stocks to profit from their decline. Instead, patience and discipline paid off and good lessons were reinforced.

Consider:

  • For the first 3 months of 2020, the Dimensional US Market Index fell 20.2%. US large and small value stocks dropped 31.5% and 39.0%, respectively–using the DFA US Large Cap Value (DFLVX) and DFA US Small Cap Value funds (DFSVX) as proxies.
  • Yet, for the full 24 months (2020 and 2021), the Dimensional US Market Index, the DFA US Large Cap Value fund, and DFA US Small Cap Value fund rose 54.2%, 27.3% and 43.0%, respectively.

Besides the obvious growth of wealth that resulted from the 24-month returns, there were additional benefits that will pay off for our clients for years to come. They include:

(1) The appreciation of the additional shares of the stock funds purchased as a result of rebalancing from bond allocations.

In contrast to advisors and clients who froze and did nothing, and those who actually sold some or all of their stock allocations expecting a much worse and longer-term collapse in stock prices.

(2) The realization (once again) of how fast markets can recover from short-term panic selling.

A lesson similar to the “Black Monday” crash of October 1987.

(3) How truly destructive any attempt at market timing would likely have been.

A painful lesson the advisory firm I worked for prior to my co-founding of Equius learned all too well from the 1987 crash. They got out of stocks prior to the crash (based on a computer program), but didn’t get back in (due to humans overriding the computer). A large percentage of clients fired them as a result. I believe Blinky the Computer was fired also.

You can see the negative “blip” on the graphic below along with all the previous declines and their recoveries since 1928.

Advisors and investors who attempt to “preserve wealth” by avoiding these downturns are playing a fool’s game. These declines are inevitable and unpredictable (in the short-run). Wise investors know this and wait patiently and confidently for their broadly diversified portfolios to recover.

Equius Partners, Inc. is a Registered Investment Advisor.

Past performance is not a guarantee of future results. The data and information set forth herein are provided for educational purposes only and should not be considered tax, legal or investment advice; a solicitation to buy or sell securities; or an opinion on specific situations – as individual circumstances vary. There is no guarantee an investing strategy will be successful. Investing involves risks, including possible loss of principal. Diversification does not eliminate risk, including the risk of market or systemic loss.

Please consider the investment objectives, risks, and charges and expenses of any mutual fund and read the prospectus carefully before investing. Indexes are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

© 2022 Equius Partners, Inc.

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