What COVID-19 Can Teach You About Investment Strategy
If your portfolio was dominated by travel, hospitality, or airline stocks in March 2020, you were in for a rude awakening. But had you invested in Zoom—a company that has become synonymous with communication—you were in for a pleasant surprise. What does this say about COVID-19 and your investment strategy—or your investment strategy in general? We cover some lessons in this article.
The Pandemic Landscape: A Look at 2020
The coronavirus has been global in its impact, rocking economies worldwide by forcing shutdowns and subsequent losses in nearly every sector. After Americans began sheltering in place, markets took a nosedive in March, landing us into recession territory. Since then, the markets have climbed upward, but economists still debate the shape of the economic recovery.
With travel restricted and businesses shuttered, travel and hospitality stocks saw the most devastation. The following chart from MarketWatch shows U.S. airline stocks and the S&P 500 for the first half of 2020:
Source: Hugh Wilson, “COVID-19: Stock Trading in the New Normal,” Raconteur, June 29, 2020.
Yet while travel and hospitality stocks took a big hit, other industries saw growth.
Thanks to lockdowns, many Americans turned to the internet to order essentials, such as groceries. The internet also enabled many businesses to stay open, and remote working became widespread. One technology in particular, Zoom, became ubiquitous as we met online for family get-togethers, company meetings, educational classes, and worship services.
Zoom Video Communications Inc. hadn’t been on many people’s radar before March. But once the pandemic hit the U.S., its technology suddenly became a necessity, and the company tripled its customer count in the first quarter alone. Its stock is now up a whopping 600%, and it had revenue growth of 355% in the third quarter.
How many people could have predicted that Zoom would be the company that would keep us together while social distancing kept us apart? Which leads us to our lessons from 2020 …
Which Investing Strategy Should You Have in a Pandemic?
It’s almost a trick question because our answer will be the same no matter what is going on in the economy. Whether we experience boom times or bust, history and academic research show that the best investing strategy is broadly based. It is diversified.
To go back to this article’s opening question: What if your portfolio had been heavy in travel and hospitality stocks when the pandemic took hold? What if your portfolio tilted toward airlines and cruise lines? You would have suffered significant losses, setting you back for years, if not decades.
But with a diversified portfolio, such as a mutual or index fund, you would have owned a broad base of stocks. Your portfolio still would have taken losses, but it also would have enjoyed the gains of 2020’s winners, like Zoom.
This chart shows the returns that various portfolios would have earned between 2001 and 2019. The diversified portfolio comes out ahead:
Source: James D. Peterson, “Why Global Diversification Matters,” Charles Schwab, November 13, 2019.
Diversification helps manage volatility as we have experienced in 2020. And though it will not eliminate your investment risk (no strategy can do that!), it can help reduce it.
Our Roseville, CA financial planning firm emphasizes diversification because we believe it offers the best opportunity for people to achieve the returns they need for long-term goals, such as retirement.
Remember the Fundamentals
As 2020 nears the finish line, we are all hoping for a better 2021. But if 2020 shows anything, it shows that nothing is predictable. Recessions come and go—markets go up and down. And it is best to focus on what we can control.
What can you do? You can establish a long-term investing strategy that helps guide you in turbulent times. We generally recommend a diversified, broadly based investment portfolio that emphasizes low expenses and tax efficiency so that you keep more of your money working toward your objectives.
If you are wondering if your portfolio meets your needs, then consider talking with a financial advisor. A fee-only, fiduciary financial advisor will give you advice in your best interests, not theirs. They can help create an investing strategy and portfolio based on your situation, goals, and tolerance for risk.
Schedule a complimentary, 15-minute call with a fee-only, fiduciary financial advisor today to discuss your personal situation.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
Parkshore Wealth Management is a family-owned, independent, fee-only Registered Investment Advisor serving the greater Sacramento area with an office in Roseville, CA. We partner with financially responsible individuals and families who are eager to take positive steps that will allow them to use their money to build the life they desire. The firm is led by Harold Anderson, CFP®, and Daniel Andersen, CFP®, both members of NAPFA, the country's leading professional association of fee-only financial advisors.