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The Smart Take:
What a year 2020 was. Pandemic. Contested elections. Civil unrest. Rollercoaster investment markets.
As Churchill wrote, “Those that fail to learn from history are doomed to repeat it.” Listen to Kevin discuss investment lessons you can learn from 2020 to be a smarter investor and keep your retirement on track for years to come.
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Timestamps:
2:04 – What Stood Out to Kevin in 2020?
11:54 – Diversification
14:02 – Dealing with Market Volatility
21:54 – Reaction to the News
25:27 – Looking at the Returns of 2020
26:29 – Planning for 2021
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The Host:
Kevin Kroskey – About – Contact
Intro: Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions and get educated about the financial world. It’s time to Retire Smarter.
Walter Storholt: Welcome to another edition of Retire Smarter. Walter Storholt here with you alongside Kevin Kroskey, President and Wealth Advisor at True Wealth Design, serving you in northeast Ohio, southwest Florida, and the greater Pittsburgh area. It’s a big triangle service area that you’ve drawn, Kevin. Essentially from, oh, I’m going to pull out some old geometry here. Is that the…
Kevin Kroskey: Isosceles
Walter Storholt: Yes, isosceles triangle. It’s exactly it, very skinny and long. I knew you’d pick right up where I was going with that. Fantastic.
Kevin Kroskey: I was going to ask you the same question, but look at that, Walter, our relationship, we’re just finishing each other’s thoughts and sentences these days.
Walter Storholt: You may trip me up well on math, but I’ll have you know I was a pretty darn good math student back in the day. I don’t know why when I put the headphones on, all of a sudden, I become an idiot when it comes to your math questions, but I did well back in my math studies.
Kevin Kroskey: You do well today, too, Walter.
Walter Storholt: I appreciate that. Well, happy 2021 to you, sir. First show of the new year.
Kevin Kroskey: Yeah. I’m looking forward to it. Last year was just such a strange year; I figured it was appropriate that we take a look back and just go through the year and what happened. And, certainly, some major things still going on, both with the coronavirus and, unfortunately, with the elections. I guess the elections are over, but the political ramifications of them aren’t. But I think there are definitely some nuggets that we can pull out and take with us positively and learn from in looking back and then make smarter decisions going forward. I thought that’s what we would do today.
Walter Storholt: I didn’t catch many of them, but all the major news stations and the morning shows will all put together probably a five or six-minute year-end review highlight reel of things that happened from the year. I don’t envy the people that had to put that together for 2020 because that must’ve been quite the task because they always have a mix of the bad news and the good news of the year. And it was just so skewed to one side, it seemed, all year long that it must have been just a very daunting task to try and put that 2020 year into perspective for the major networks. But, from a financial perspective, I think that’s a little bit more doable task. I feel like it’s a weird question to say what stood out to you in 2020 and worthy of review on the show because it seems like those answers are obvious, but I know you’ll always have a good spin and perspective on things.
Kevin Kroskey: Well, I’ll do my best. Obviously, we have to go back to the beginning of the year. And if we think about the year, interest rates were going lower. They were already low, and they were going lower. They started the decline in 2019. And stocks had done pretty well in 2019. They were coming into 2020 pretty expensive. A lot of the increase in the stock market in ’19 really wasn’t the result of earnings, but it was more the result of just people bidding up prices. And so we’re coming into the year and had a little trepidation as certain things looked a little expensive and just trying to build that all-weather portfolio and help people meet their goals and stay on track for retirement, and then COVID hits, right? And this is the first time anybody here domestically went through the kind of shutdown that we went through.
Kevin Kroskey: I think it snuck up on most people. Certainly, it snuck up on me, but I think it was maybe late January when the first person in the US was at least diagnosed to have it. And then it seemed like, “Okay, we’ve seen this before: SARS, MERS, what have you, swine flu. And these things just come and go,” and then it really picked up speed. And by the time mid-March rolled around, the World Health Organization declared the pandemic, and we were locked down mid-March. And, I mean, it was breathtaking going through it. Markets, in general, don’t like uncertainty, and this was certainly uncertain if you will. And when the market reached its peak in mid-February, I think it was February 19th or so, the S&P 500, the US market, fell about 34% in less than five weeks.
Kevin Kroskey: It’d never fallen to that degree that quickly. It was historic in that regard. People were panicking. It was a health induced crisis. People were scared about dying. People were concerned about their health and their loved ones. I think it only added to just the uncertainty and the panic that was palpable for several weeks. And, certainly, the market responded to it because people sold stocks, took money out of the market, and basically moved to cash or moved to bonds. And some of the things that we talked about, when I go back to look at the podcast episodes, we started talking about, “Hey, making sure that we’re staying focused, we’re staying diversified, we’re staying disciplined. We’re not really reacting.” And I’m just trying to keep people disciplined.
Kevin Kroskey: I went back and listened to a few of the podcasts that we recorded, and in the throes of it in March, you could, I could anyway, just hear it in my voice where we were really busy every day just doing work that we needed to do for clients in terms of adjusting their portfolios, harvesting tax losses, rebalancing their portfolios, making sure that they were still on track, that we didn’t need to make any spending adjustments mid-year. Who knows what was going to happen. I mean, I think most people would have thought that it was going to last a lot longer, at least in terms of the market decline, than it did. But, some of the things that we talked about were really not trying to time the market. Certainly, it sounds great. Who wouldn’t want to participate only when the market’s going up, but it just doesn’t work.
Kevin Kroskey: The theory behind it we talked through in one of the episodes of March was that, theoretically, 80% of market timing strategies fail. And then, I went through the actual evidence of different mutual fund managers that are in, what Morningstar calls, the tactical asset allocation category. And over the time period that I analyzed, coincidentally, or maybe not coincidentally, 78% of those funds underperformed over the prior three years, and 89% underperformed over the prior five years. The theory was 80%, the actual was about that or worse net of all fees. You go through those time periods, and you’re scared. You’re not sure what to do. You see the market going down, and you just project forward linearly that it can only get worse.
Kevin Kroskey: But, if you move to cash, the market reached a bottom on March 23rd. And then if we just look from, say, the end of April, excuse me, the beginning of April to the end of the year, the market, the S&P 500, returned 68%. Bonds, if you moved into Agria bonds, you didn’t do too bad, but you did 6% or one 10th of what the market did. Huge difference there. Unfortunately, a lot of people moved out in general. I mean, you could just see this from the flows and people having more cash on the sidelines and in aggregate. We really didn’t have any clients that did. I can think of one client; unfortunately, that did it. But, outside of that, we didn’t have clients that did that.
Kevin Kroskey: And we certainly had a lot of conversations about people that were concerned, and as we talked about on the podcast, tried to dissuade them from doing so. And, generally, we were successful in doing so, and that’s benefited them looking back. But, the thing that we always talk about and tried to really explain to people is, “Hey, the market’s forward-looking. Things are really uncertain right now. The market has sold off. Now is not the time to go ahead and lock in those losses. We don’t know exactly the course that this is going to take, but the markets are going to be forward-looking.” When you’re buying shares of Apple, you’re not just buying earnings for one year; you’re buying earnings for the next 20 or 30 years. And just trying to keep people in perspective from a financial planning standpoint, none of the money that you’re going to be using, or at least none of the money that you should be using, is going to be in stocks, say, over the course of the next few years.
Kevin Kroskey: I like to call this runway. You need to have some safer, higher-quality assets that you can rely on to go ahead and meet your spending objectives for whatever it may be; anything that’s not being met by your pension, your social security, or what have you, and that you can go ahead and pull down in times of distress like we went through earlier in the year. And one of the things that we did in March, we ran a fire drill. And through our systems, we just really went through and calculated how much runway do all of our clients have, who is most at risk of needing to make a change. And we just went through that in relatively short order. There’s a fair amount of spreadsheet and manual work that was involved, but we went and took a look at that.
Kevin Kroskey: And then the ones that were maybe more at risk, we dove deeper and really looked into that. And the ones that we knew that had a lot of runway. I mean, some of our clients, they might have 20 years of runway just because they’ve done really well saving and investing over the years. And they live below their means. A lot of those clients we talked about, “Hey, the market’s sold off a lot. Yeah, things are still really uncertain, but the price actually looks fairly attractive, so maybe we can be opportunistic here and increase risk.” And as we’ve talked about in prior podcasts, we did that for many of our clients, did a diversified fashion over a period of a few weeks. These are all things that have happened more recently.
Kevin Kroskey: One other thing just came to mind. I think it was mid-year, Walter, we talked about a survey from Institutional Investor magazine. And, basically, the question was, let’s see, is the market factoring in the long-term implications of the coronavirus too little or too much. And 65% of the investors surveyed said it was too little. And so I think that survey was done either in late June or early July, but if you look at the market returns from July through the end of the year, the S&P was up more than 22%, and bonds were up just a pretty meager 1% at that point in time. You really can’t predict these things short term. There’s an old saying by one of the fathers of investing, if you will, Benjamin Graham. He said, “In the short run, the market’s a voting machine, but in the long run, it’s a weighing machine.”
Kevin Kroskey: And I don’t exactly know the context of when he came up with that saying, but the votes can be a little bit more all over the place. People could be swayed. People could just go ahead and follow the herd if you will. Whereas the weighing machine, long-term, you know how much you’re going to weigh, and you’re just going to get a true measurement. Long-term earnings growth drives the returns of stocks over time. Short term, there’s a lot more sentiment and emotion and some bad behavior, if you will. And you can’t predict that. That’s why you have to come back and really rely on the plan that you have, making sure that you have enough runway, making sure that you have enough high-quality assets, but also looking forward to where the returns are likely to be in the future and how to position yourself to go ahead and take advantage of them.
Kevin Kroskey: One last thing I want to mention, at least from the investment perspective, is just diversification. It’s something that you should never abandon. We’ll talk more about this probably in a future episode, too, but one of the things that I like to say is anytime that you look at your investment portfolio, there’s probably something you should be unhappy with because if everything is zigging together or zagging together, it probably means you’re not diversified. When things happened in March, higher-quality bonds, treasury bonds did well. Long-term government bonds went up quite a bit earlier in the year when stocks were selling off. You need that. And then, on the stock side of it, you need to stay broadly diversified across companies, industries, sectors.
Kevin Kroskey: Certainly, we all know that airline, hospitality, retail, all that travel, and leisure has just been taken out to the woodshed in 2020 when anything like online shopping, technology, communications, companies like Zoom, or what have you emerged as winners. You never really want to abandon diversification. You want to stay broadly diversified. You have to know the markets are forward-looking. You need to be able to think that way as well. Sometimes what’s going on in the economy will not match up with what’s happening in the investment markets like we saw in spades in late March and April and since then. In market timing, even though it sounds great, it just doesn’t work. You have to really have a process. You have to have a plan, and you have to stick it.
Walter Storholt: I just emerged from the year of 2020 with just this really weird dual feeling of the world is in this tenuous spot, right. There’s still just a lot of uncertainty around the election and the fallout that we’ve seen since then with the protests and then the storming the Capitol and still coronavirus questions. And we endured all of this through 2020, and it’s still ongoing into 2021. I think we all joked that it was nice for that year to come to an end, but we were also fooling ourselves if we thought just the calendar turning a page was going to actually stop some of the bad stuff from 2020 from continuing. But, I just think these very mixed emotions about the market and investing, Kevin, I don’t know if you have other people who have come to you feeling this way as well, but we saw how the market could be exposed as a dangerous place when we saw those rapid declines at the beginning of the coronavirus.
Walter Storholt: And even though we’ve then seen the evidence of how it bounced back through the year, I’m still at this point now not knowing what these next couple of weeks are going to look like politically. And it puts you right back in that same kind of feeling of that unknown, that uncertainty, the good times can’t last forever. Are we going to just go nose-diving right back down and see another humongous loss in our portfolios? And especially since 2008 isn’t that far in the rearview mirror.
Walter Storholt: I don’t know, just as an investor and a saver, maybe because all these things have happened recently, they feel more impactful, but it sure feels like the roller coaster of the market has gotten to be a lot more like the Vortex ride at the local amusement park at Cedar Point versus the Scooby-Doo ride, That if you look at historical charts where the dramatic things that happened were less frequent, there was the one or two exciting ups and downs occasionally. Now, it’s like one of those roller coasters that just twists all over the place. And, I don’t know, as an investor and a saver, that can just be hard to emotionally keep up with at all.
Kevin Kroskey: You have a great point. Don’t keep up with that.
Walter Storholt: Okay, Kevin.
Kevin Kroskey: Don’t look at it. That’s the simple answer, Walter, and that’s probably the right one, too. I mean, there have been different studies over the years that show the more attention you pay to it, the less you tend to do. Warren Buffet said it quite well, “Investing is like soap. The more you handle the investments, the less you have.” I think that’s-
Walter Storholt: What a comparison. Wow. That’s good.
Kevin Kroskey: Yeah. I mean, he’s just brilliant.
Walter Storholt: I hadn’t heard that one before. That’s really good.
Kevin Kroskey: Yeah, Really, really good. That’s one of my favorites for sure. But, the market was actually quite calm for many, many years. Uncharacteristically calm. Really, the fall of 2018, the fourth quarter of 2018, excuse me, was volatile and came somewhat out of nowhere. The market sold off a lot, nearly went down 20%. I believe bonds sold off. 2018 was a terrible year. Basically, everything went down that year, bonds and stocks. And that was the first ripple that we had had for many, many years after the Great Financial Crisis. And so I would say that that period of calmness was abnormal. We certainly have had some of these major events, like the tech bubble, 2008. And I guess we could put 2020 COVID on there, too, where you have these really big declines that historically had been more like once in a generation, but it seems like it’s happened more frequently, but I wouldn’t necessarily draw any conclusions from that.
Kevin Kroskey: Time will tell, quite honestly, whether it is something. I mean, markets are certainly more connected. Global economies are certainly more connected; the information flow is more so. I think there’s certainly a thesis there that maybe we are likely to continue to have more of these ups and downs to these large degrees that we’ve had. But, we’ve also had these extended periods of calm markets. I mean, it was probably 2018. I was just getting really concerned, like, “Hey, this is not normal. Returns have been great, but clients are going to think this is normal.”
Kevin Kroskey: And so we just gave them a little survey before we had our progress meetings, and it was basically, “Hey, how often does the market go down 10%? And then how often does it go down 20%?” And you just gave them multiple choice answers. And virtually everybody thought that the market went down to those degrees much, much less than what it actually has done historically, so my thinking was right. People were thinking like, “Hey, this is great. I mean, this is just going to keep going. We’re not going to have big declines, and everything’s going to be hunky-dory.” And I was just trying to prepare them mentally, letting them know and reminding them that, “Hey, the market’s normally not like this, that we are going to have these hiccups. And, certainly, it’s been smooth sailing for now, but who knows when that next wave is going to come out of the blue and knock us over.”
Kevin Kroskey: But, regardless of that, from an investment perspective, we’re still fine from a planning perspective. And you mentioned the elections, and we talked about this, I think, in September. It’s every four years. It’s always a question that comes up. And so it tends to be good that we can communicate about it. And we all have beliefs, I always like to say, but we have more than 200 years of history and evidence of what happened in our country around these elections and in the markets, so I prefer to rely on the history and evidence rather than speculation and your political beliefs. When I was preparing for that talk that we had, I found a Pew research poll that was done in January of 2020. And they just looked at Democrats and Republicans. And it was also compared to a time period of 2016.
Kevin Kroskey: And they just asked, “Hey, do you have a positive view of the economy?” And in November 2016, Trump wasn’t elected yet; only 18% of surveyed Republicans had a positive view of the economy. And then, in January of 2020, 81% of surveyed Republicans had a positive view of the economy. I don’t know if it was the same people who were surveyed or not. I didn’t look that closely. The Democrats, on the other hand, 46% were positive in November ’16, and 39% were positive in January ’20. So I quipped that certainly, the Republicans seemed to be more fickle, but the Dems just seem to be constantly negative. You have these perceptions. And we were having conversations with people, particularly a lot more of our conservative clients, about concerns about the election and what have you.
Kevin Kroskey: Actually, I think it was both, but the concern was, well, what if the election is contested? And what if there’s no clear winner, and what if this person wins, what if Biden wins or what have you? And, candidly, most of the worst-case came to fruition. We had no immediate winner. It was a contested election. It was messy. And for a lot of the people that lean red, their guy didn’t necessarily win, but guess what? The market still went up. And then, to me anyway, more surprisingly, when we had the runoff election for Georgia, I mean, I think the betting polls when they opened were like 70% that the Republicans were going to hold on to the Senate. And, apparently, the polls were actually right for this one, but I was really surprised that both Democrats won that election.
Walter Storholt: I think if you went back and listened to one of our end of year shows, we were assuming that we were headed for a little bit of that gridlock. We were kind of penciling in. You know what happens when you assume, and I think that’s fine. We’re not afraid to admit that we didn’t assume correctly in that example, so. It’s interesting. Yeah.
Kevin Kroskey: Completely interesting. And guess what, and I would say that it was a surprise, and the market went up that day. The market tends to do well, regardless of who’s in power. I’m not saying politics don’t matter, but the US economy, the US investment markets, and the global economy for that matter, I mean, we’re investing globally when we invest, it’s a lot more than who’s just in the White House or who’s controlling the Senate or what have you.
Walter Storholt: But, it didn’t even seem like the market blinked in the middle of the Capital being stormed into. I mean, not even nudged. It’s like it’s disassociated from reacting to the news all of a sudden even. I heard somebody say it’s Teflon; nothing can beat it. And I have a feeling we’re setting ourselves up for a cruel reality if we’re getting that strong about it.
Kevin Kroskey: Yeah, no. I don’t disagree. I was happy to turn the page on 2020 and get a fresh start. And we were looking really good for five days, and then our Capitol got stormed. And, unfortunately, I think five people ended up dead. I mean, it’s crazy. I just can’t believe it. And I think it’s even worse than the details that are coming out now. And so a lot of the people that had concerns about the election, I mean, I would say it’s probably about as bad as what they could have thought. And yet, if you would have panicked out, you would have missed a lot of strong, positive returns. I hope people are going to learn from this. I hope we’ve provided evidence. I’ve written articles. I’ve used history, but people are people.
Kevin Kroskey: People are emotional at the core. The emotional part of our brain works more quickly than the rational part of our brain. It worked really well when we were cavemen or needed to survive the bear in the woods, but it hurts us when there’s a bear market, and we behave irrationally. But, most of our clients haven’t acted, what I would call, somewhat irresponsibly, financially speaking from a financial and investment standpoint. We stick to the process. We try to stay disciplined. We have a plan. We try to make it clear. We try to use evidence. We try to show them what this really means to them in terms of, “Hey, is it really going to impact your lifestyle? Where’s your money coming from? Do we have time to sort this stuff out? How much runway do we have?” All those things come together. But, in general, if you’re reactive, if you’re emotional, you’re probably not making a good decision.
Kevin Kroskey: It just doesn’t work that well when it comes to investing. We’ll see what happens moving forward. There’s always going to be some crises du jour or something else is going to come up. Most of the content in the USA Today, or whatever journal or article or news media outlet that you’re watching, tends to be negative. If it bleeds, it leads, the saying goes. The message of, “Hey, keep your investments low costs, stay diversified, be prudent,” I mean, maybe you sell one issue in Money magazine with that cover story, Walter, but I got to imagine you’re not selling that month in month out sort of thing. I get it. It’s the way that the world is today. We’re inundated with different media sources, but you just got to cut out the noise and focus on what matters and then try to ignore the things that don’t.
Walter Storholt: Yeah. When I was the news director at a local radio station, the stories that we would do about the local festival or there’s a new business opening up over here, well, sometimes those would be popular depending if it was a cool restaurant that people would be interested, but for the most part, the feel-good stuff, yeah, doesn’t get the clicks. But, I think the headline that got us the most clicks of all time when I was the news director was Man Punched in Face Downtown. The story got liked and shared and talked about more than any other story. And it was just a story about a guy who was walking downtown and got randomly sucker-punched in the face. But, people were like, “Oh, conflict. Yes. Let’s read about that.” It does drive the news. Then it bleeds, it leads mentality is definitely forefront for a lot of people.
Kevin Kroskey: Yeah. And so, if you just looked at the full-year returns, the US market was up about 18%. S&P 500 emerging markets were up about 18%. Foreign developed markets were up about eight, and then US aggregate bonds were up about eight. If you just looked at it like, “Wow, what a great year,” and if you just went to sleep for a whole year, and that’s all you saw when you woke up, think about everything that we went through in between. And that’s where we ended up. I mean, you can’t time this stuff, certainly, in the short term. Again, there’s some evidence where you can overweight or underweight cheap or expensive assets more so the medium-term or so, but we’re talking several years there to have any reliability in the outcome. Short term, nobody knows what’s going to happen.
Kevin Kroskey: You know, any of the predictions that are being made right now for 2021 are going to be wrong. If they’re right, they’re only going to be by accident or by luck. It’s just the way things go. You need a plan, and then after you have that financial plan, after you have a retirement plan, with your investments, you need that science-based process to go back and align the investments to your financial plan. And then, simply put, you just need to tune out the noise and stick to the plan and the process. If you need to go ahead and it doesn’t mean that you just don’t do anything, you set and forget it. There are tons of things to do. There are tons of things that we did going through the downturn earlier this year, again, rebalancing, tax-loss harvesting, maybe making adjustments to the plan or the spending plans, being opportunistic for some people, and increasing risk and ultimately earning greater returns at this point in time.
Kevin Kroskey: There’s a lot of things to do, but it still all emanates from the plan, and it’s all process-driven. It’s not emotional knee jerk reactions. I could say the same message on every podcast, but hopefully, we can learn from the extraordinary events of 2020 and maybe take this with us to help us make us smarter investors moving forward.
Walter Storholt: Yep. At least take the opportunity to reflect and look forward and remember the feelings that we had in 2020 and how you reacted and is that the way you want to react and make decisions in the next crisis, in the next thing that comes along. Certainly, if we can embrace and remember some of those feelings and the way that we reacted in the past, we might be able to improve it going forward, or if we did well the first time around, make sure we do it again the next time we need to be faced with big decisions, like do I stay in the market? Do I go against Kevin’s guidance that he’s giving me because my guts telling me something else? How do those conversations play out?
Walter Storholt: All good things to be thinking about going forward because it’s not a matter of if but when the next big crisis comes along and how will you react to it, especially when it comes to your finances. If you need help analyzing how you’re currently positioned and prepared financially and for retirement and your financial future, don’t hesitate to reach out to Kevin. The number to call is (855)TWD-PLAN. That’s (855) 893-7526. And you can always go online to truewealthdesign.com. Click the “Are We Right For You” button and schedule a 15-minute call with an experienced advisor on the True Wealth team.
Walter Storholt: Kevin, thanks for the help. We look forward to another conversation with you soon.
Kevin Kroskey: Thank you, Walter.
Walter Storholt: All right. Talk to you soon. That’s Kevin Kroskey. I’m Walter Storholt. We’ll talk to you next time on Retire Smarter
Disclaimer Information provided is for informational purposes only and does not constitute investment, tax, or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance reference is historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.
