Extraordinary year offers familiar lessons for investors

No matter how much a global pandemic has changed our lives, some things remain the same.

In many respects, we have never seen a year like 2020. That applies to financial markets as well.

The S&P 500's 35% nose-dive in 33 calendar days was the fastest collapse of that magnitude in its 63-year history.

The Dow Jones industrial average rose at least 1,000 points in a single day eight times (it had only done so once before this year).

The VIX volatility index hit an all-time high of 85.5, eclipsing the previous record set during the Great Recession.

And crude oil prices traded below zero in April when a massive supply glut crushed short-term demand.

Yet as we look at the year in review, the lessons investors can learn are for the most part familiar ones.

Rule 1: Ignore the doomsday predictions. When it comes to financial forecasting it's usually the loudest voices that get heard, not necessarily the wisest ones. In the midst of a market sell-off, it's easy to think about worst-case scenarios, and media personalities — especially in this age of polarization — are happy to fuel those concerns if it leads to more clicks and bigger headlines. The U.S. economy has withstood dozens of "disasters" and overcome all of them. COVID-19 is the latest illustration.

Rule 2: Volatility creates opportunity. Every bear market and every recession are different, but the one common theme is that all of them are followed by a recovery. It was impossible to know in March how long it would take stocks to recover from their coronavirus crash, but history made it clear a rebound was inevitable. Corrections create buying opportunities. It's as simple as that. Don't fear the negative moves in stock prices. Embrace them.

Rule 3: Don't let your politics drive your investment decisions. Conventional wisdom suggests Republican leadership is better for the economy. Did you know that since 1952, the S&P 500 has averaged gains of 10.6% annually under Democratic presidents compared to 4.8% under Republicans? That does not imply politics are the reason for the relative performance and that's exactly the point! Even in a year with extreme political polarization and a contested election result, the stock market hardly wavered.

Rule 4: Stay invested at all costs. It's OK to trim equity exposure, especially if you are overweight long-term targets or take regular portfolio withdrawals. The fact that U.S. equities trade near all-time highs, however, is evidence that staying invested has always proven profitable. As one client told us in March, "This is my fourth crisis. I've found that if I do absolutely nothing, everything will turn out fine."

Rule 5: Don't fight the Fed. Yes, we've all heard this four-word mantra countless times. It's still true. Despite concerns that near-zero interest rates left the Federal Reserve low on ammunition, Jerome Powell's "whatever it takes" approach proved once again that central bank policy is perhaps the most significant near-term driver of asset prices.