Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.

Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.

We learned a few tough financial lessons in 2020 | Guest column

  • Wednesday, January 6, 2021 8:20am
  • Opinion

What did we learn from 2020?

2020 was a year of records, stark contrasts and wild swings in the stock market. We started the year with record (or near record) employment and ended the year with record unemployment. The stock market witnessed new records for both the shortest bear market in history and the fastest bear market recovery in history.

March 2020 set new records for intraday volatility. The acceleration and depth of the suffering caused by COVID would have been virtually impossible to forecast on Jan. 1, 2020, and attempting to do so would have been essentially guesswork. And despite all this, the stock market as measured by the S&P 500 gained about 16% for the year, a well above average return.

There are lessons to be learned from the events of 2020. An important one is to be prepared for uncertainty by incorporating “uncertainty” into a financial plan. As planners, we can prepare for uncertainty in a number of ways, for example, by using conservative planning assumptions for variables like expenses, investment returns and market volatility.

We can also “stress test” financial plans for unlikely or extreme scenarios that provide the client with better insight and guidance on how to deal with and prepare for an untoward event. True, planning for uncertainty involves subjective judgment, but a sound financial plan can provide the clarity to develop a better action plan and options.

The second lesson is “don’t put all your eggs in one basket.” We’ve all heard this, but in financial planning it can be a critically important way to help clients weather a difficult period like 2020. As planners, we advocate diversification across multiple assets classes when investing client assets. These asset classes include stocks, bonds, commodities, and real estate. Asset classes have differing correlations of returns against one another.

These varying correlations help to reduce portfolio volatility over time. Lower portfolio volatility can provide higher risk-adjusted returns and can significantly increase the probability of the client achieving the goals of their financial plan.

Third, a year like 2020 reminds us how difficult, if not impossible it is to forecast the stock market. At the beginning of 2020, many of Wall Street pundits had bullish outlooks. At the depths of the market decline in March, many of these same pundits were advocating caution with respect to the market.

This is not to say they aren’t smart. They may be quite smart. But short-term market forecasting is nearly impossible and the swings of the market in 2020 prove that. The lesson here is don’t try to time the market. Market timing is the biggest performance killer for most investors.

As planners, we advocate establishing an asset allocation that is based on a sound financial plan and sticking with that allocation through the ups and downs of the market. This will help to keep clients on track with their long term goals and reduce the probability of destroying long-term returns by trying to time the market based on emotionally driven decisions.

Robert Toomey, CFA/CFP, is Vice President of Research for S. R. Schill & Associates on Mercer Island.


In consideration of how we voice our opinions in the modern world, we’ve closed comments on our websites. We value the opinions of our readers and we encourage you to keep the conversation going.

Please feel free to share your story tips by emailing editor@mi-reporter.com.

To share your opinion for publication, submit a letter through our website https://www.mi-reporter.com/submit-letter/. Include your name, address and daytime phone number. (We’ll only publish your name and hometown.) We reserve the right to edit letters, but if you keep yours to 300 words or less, we won’t ask you to shorten it.

[flipp]

More in Opinion

Don C. Brunell is a business analyst, writer and columnist. He recently retired as president of the Association of Washington Business, the state’s oldest and largest business organization, and now lives in Vancouver. He can be contacted at thebrunells@msn.com.
Vaccinations improve our health and employment numbers | Brunell

It is not surprising that COVID-19, which ravaged the world, was disastrous… Continue reading

Federal Way resident Bob Roegner is a former mayor of Auburn. Contact bjroegner@comcast.net.
Firefighters vs. the governor’s vaccine mandate | Roegner

We all thought we were in this fight with the coronavirus together,… Continue reading

Providence employees look at anti-vaccine mandate protesters as they cross the street outside of Providence Regional Medical Center Everett on Aug. 18, 2021. Olivia Vanni/Sound Publishing
Editorial: A message to the unvaccinated and unmasked

We know you’re frustrated with mandates and advice, but consider our frustrations and, yes, our anger.

Federal Way resident Bob Roegner is a former mayor of Auburn. Contact bjroegner@comcast.net.
Next year’s elections are already underway | Roegner

The 2021 session of the Washington State Legislature was dominated by the… Continue reading

Screenshot of Voice of America footage from the August 2021 scene at Kabul’s international airport in Afghanistan.
What the Afghan wants to say | Guest column

The American interest in Afghanistan goes back to the Cold War era,… Continue reading

Federal Way resident Bob Roegner is a former mayor of Auburn. Contact bjroegner@comcast.net.
King County executive wins battle with suburbs over inquests | Roegner

Since 1854, when Washington was a territory, inquests have been required whenever… Continue reading

In a three-day event ahead of the November 2020 elections, the voting center at Federal Way’s Performing Arts and Event Center saw 1,433 voters, which included 466 newly registered voters. File photo
Editorial: Baseless claims of fraud threaten voter confidence

Without evidence of fraud, it’s those alleging irregularities who are a threat to election integrity.

State Superintendent of Public Instruction Chris Reykdal told a crowd in Port Angeles he would like to see school districts have the ability to increase their local levies. (Jesse Major/Peninsula Daily News)
Message from state superintendent regarding school employee vaccinations

After a year and a half of remote and hybrid learning, my… Continue reading

A Sept. 10, 2020, satellite image shows smoke from U.S. wildfires blanketing the majority of the West Coast. (European Space Agency)
Editorial: The UN climate report, ‘The Lorax’ and us

The report and the Dr. Seuss classic offer a dire warning — and hope — for responding to climate change.

John Hamer is a retired editorial writer and columnist for The Seattle Times. He and his wife have four grandchildren.
Getting to know your wildlife on Mercer Island | Guest column

My wife and I often visit Suncadia, on the other side of… Continue reading

Federal Way resident Bob Roegner is a former mayor of Auburn. Contact bjroegner@comcast.net.
Look forward to an exciting November election | Roegner

King County Executive Dow Constantine was expected to win the August primary,… Continue reading

Don C. Brunell is a business analyst, writer and columnist. He recently retired as president of the Association of Washington Business, the state’s oldest and largest business organization, and now lives in Vancouver. He can be contacted at thebrunells@msn.com.
It’s time to rethink Washington’s long-term care law | Brunell

Time is short, but action is necessary. Gov. Jay Inslee and Democrats… Continue reading