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Lessons from the quick sell-off of 2020


By Kyle Tetting

A year ago, on March 23, 2020, the S&P 500 bottomed in the quickest bear market investors have ever seen. Quickest both in terms of how fast the market entered but also in how fast it emerged from what was ultimately a 33.9% decline. Just six months later, on Aug. 18, the S&P 500 had recovered its prior peak.

Remarkably, despite the pandemic now running more than a year, stocks continued to set new all-time highs in March 2021. Investors, now with a full year of returns under their belts, face an interesting time to be looking at account statements. One year after the bear market bottomed, the S&P 500 had gained nearly 75%.

Of course, stripping out the sell-off that led to that bear market bottom isn’t exactly fair, but that’s just one of the problems with tying ourselves to overly simplistic views of our portfolio. Bring the starting point forward or back a few weeks, and things look drastically different.

Consider the returns from the pre-pandemic peak on Feb. 19, 2020. Adding a little less than a month of data to our measurement changes the return to around 15.5%. To be fair, 15.5% is still an outstanding return, just a lot different than 75%.


I enjoy seeing just how well stocks have done over the last year, but there’s a profound lesson to be learned from the discrepancies in return caused by adding or subtracting just a few weeks to that number. Namely, market timing simply does not work.

While the Fed signaled it would take aggressive steps to stabilize markets in the wake of the early days of the pandemic, there was little certainty that March 23, 2020 would be the bottom for stocks. If anything, many investors continued to fear just how far stock prices could fall.

Unfortunately for fearful investors afraid the worst was far from over, there were few options. With the market turning from bad to worst – seemingly skipping worse – so quickly, investors wanting to react likely did so by selling stocks at the worst possible time in an effort to preserve what was left. The immediate fear of how bad it could get trumped the ability to see beyond the current issue at hand.

More articles and videos from Kyle Tetting on Money Talk

Investors who sold stocks at the bottom and waited just a month to get back in missed out on 46% of the return from the bottom. More importantly, they sold after a decline of 33.9%, meaning in total they lost 7.6% from the pre-pandemic peak as of March 23, 2020. Recall that doing nothing resulted in a 15.5% gain.

Of course, few investors had such terrible luck as to sell it all at the bottom. And, unfortunately for those who did, many have yet to return. But absent a plan for how we are supposed to navigate tumult, it’s easy to see how emotion can drive investment decisions.

A year after the depths of the market impact from this pandemic, stock investors are considerably better off. But the key was the ability to remain invested and avoid the temptations of trying to time the market at a time when the window for success was so incredibly narrow. That requires a plan. Not a plan on what to do when markets inevitably sell off, but a plan on how to stay invested when those inevitable sell-offs occur.

If you’ve read anything I’ve written, you know the plan is balance. As investors, we must include sufficient allocations to lower volatility assets like bonds to allow ourselves time to endure periods of stock market declines. While the last decline was historically short-lived, the next may not be over so quick. Our individual allocation should include thoughtful considerations about what that means for our ability to wait out the next storm.

Kyle Tetting is director of research and an investment advisor at Landaas & Company.

Learn more
A note on coronavirus volatility, by Kyle Tetting
Keeping balance in unnerving times, by Bob Landaas
Checklist for circumstances beyond control, by Joel Dresang
Ignore bonds at your own riska Money Talk Video with Kyle Tetting
When Should I …rebalance my portfolio? by Art Rothschild
(initially posted March 25, 2021)

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