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Here’s What My Crystal Ball is Saying About 2021

“Nobody can predict what these markets will do over the next year. And like everything in life, you have to keep things in balance.” Paul Carvalho

It’s hard to believe, but I wrote the quote above on January 17, 2020 B.C. And by “B.C.” I mean “Before COVID.” Last year was so crazy, it feels like I wrote that two thousand years ago (the traditional meaning of B.C.)

2020 was an incredible year. The global pandemic was obviously the top story. But there was so much more: Plane crashes, forest fires, killer bees, city explosions.

The markets were wild, too. The world economy was shut down. Millions of people became unemployed. The stock market crashed. Then it boomed.

To put things into perspective, the price of oil went negative in 2020. Negative!

Think about that for a second: a negative price. Imagine going to a gas station to fill up your car, and the guy at the counter says, “You put in 50 litres of gas. I owe you $55.” Crazy.

A big part of my job is helping people plan for the future. But how do you make plans when years like 2020 happen?

Good question.

My magic crystal ball

There’s no shortage of experts making predictions for 2021. They grab your attention with headlines like “You’ll never guess what I’m predicting for 2021!” In fact, that’s exactly what I did with the title of this post. (You’re here, aren’t you? So it works 😉 )

But here’s the truth. These “experts” don’t know what’s going to happen in 2021. Nobody does! That’s what I said in January 2020. And that’s what I’m saying now.

It’s funny.

If a time traveller came back to tell you about 2020 before it happened, would you have believed them? A global pandemic. Killer bees. “Tiger King” will be a hit series on Netflix. All of that sounds nuts!

Yet it all happened.

And that’s not the only thing. Even if you could magically predict the future, it’s impossible to know how the markets will react.

Here’s a perfect example. Earlier this year, the U.S. Capitol Building was attacked when Congress was certifying the 2020 election. A violent mob knocked down security barricades, smashed into the building and looted the place. Five people were killed during the riot.

How did the stock market react that day? The S&P 500 hit an all time high.

Focus on Preparation, Not Predictions

My crystal ball works as good as everyone else’s. It doesn’t. So what should investors focus on? Preparation.

Listen. 2020 was an absolute crazy year. But crazy things happen in the market all the time. Instead of trying to predict the future, investors should prepare for the eventual crazy times.

Investing math is actually pretty simple. Over the long run, stocks beat bonds, and bonds beat cash. But there’s a catch. Anything can happen in the short run.

A well diversified portfolio will grow over time. But the portfolio can swing wildly from year-to-year. That’s why investing is so hard. To achieve your goals, you need to prepare for some adversity.

Having a good plan is crucial. Why? Because it’s not the crazy times that get you in trouble. It’s how you react to them.

The Biggest Factor to Your Success: You

For investors, 2020 had it all. The fastest bear market in history. One of the fastest recoveries in history. And everything in between.

The markets are unpredictable, but investor emotions are pretty consistent (as illustrated below). 

2020 started off with optimism. But news of a pandemic created anxiety (February). Full blown panic set in and the market crashed (March). Governments acted quickly to provide some financial relief (June). Finally, new vaccines arrived, which created excitement (December).

Source: Russell Investments

Many Canadians will receive their 2020 account statement soon. Just keep this in mind: How your investments did depends mostly on how you reacted during the year. If you had a good plan and stuck to it, you probably did well. If you had no plan or made changes on the fly, you probably did poorly.

Not having a plan leaves us all vulnerable to mistakes. Sometimes our emotions get the better of us, causing us to do the wrong thing at the wrong time. A good plan guards against that.

The beginning of the year is always a good time to review your finances. Although there’s no magic formula, all good strategies have some common elements.

Here are three things to consider when reviewing your plan for 2021:

1. Choose a plan that suits you:

Like I’ve said before: Not having a plan is dangerous, but having the wrong plan is lethal.

It’s important to have an investment plan that suits your goals, abilities and temperament. Remember: At some point in the future, the stock market will revisit crazytown. So you need to have a plan you can actually stick to.

Here’s an example. If you started 2020 with a $100,000 portfolio invested exclusively in the Canadian stock market, the balance would have fallen to $67,390 on March 23, 2020. Assuming you held on, the portfolio would have rebounded to $101,506 by the end of the year.

That’s an incredible swing! Would you be able to stick to a plan like that?

By contrast, I’ve been recommending a globally balanced portfolio of stocks and bonds for a few years now. In 2020, over 93% of my long-term client portfolios had returns between 10% and 16%.

These portfolios were not immune from the downturn in March, but they did have better downside protection. That helped clients stick to their long-term plans.

2. Avoid the extremes:

As we saw above, investing can take you on an emotional roller coaster ride. Today, excitement is turning into euphoria, especially for some sectors of the market.

Big technology stocks, IPOs and Bitcoin all saw massive gains in 2020. Big gains always attract new investors (also known as “chasing performance.”) Big gains also encourage some investors to concentrate their bets even more.

The problem is no stock or sector outperforms the market all the time. One day, something else will replace the performance generated by technology stocks like Tesla. That’s why holding a diversified portfolio is a good idea.

I remember talking to a client during the tech bubble days in early 2000. She wanted to mortgage her house and invest all the money in one tech stock. I convinced her not to do it. And she didn’t lose her house when the bubble finally burst.

Like John Templeton said, “The only investors who should not diversify are those who are right 100% of the time.” That’s good advice, because nobody has a working crystal ball.

3. Find a good coach:

Like a good coach, an independent advisor can help you stick to the game plan. They can calm you down when emotions run high, keep you focused on your goal, and increase the odds of your success.

A Final thought

I’ve been in the investment industry for over 20 years now. I thought the technology bubble of 2000 would be the biggest event in my career. But that was followed by the financial crisis in 2008, and now COVID in 2020. It just goes to show, nobody knows the future.

We made it through those challenging times, and I’m sure we’ll endure whatever lies ahead. I wish you all a safe and healthy 2021.

Money doesn’t have to be complicated.

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