Lessons from the Covid Stock Market

by T. Claire Kest, CFP®, CAP®

Two Thousand Twenty was an emotional roller coaster of a year, and money played a huge part in those swings. On February 16, 2020, the S&P 500 (SPX) closed at a high of 3,386. Over the next few weeks, investors panicked and sold their stocks at an alarming rate. Trading was halted on the New York Stock Exchange four times in a two-week period. On March 23, 2020, SPX closed at 2,237, 34% lower than its previous high.

But the recovery came quickly. If you traded stocks between April and December 2020, you probably thought you were brilliant stock picker. But the reality is, you could have bought almost anything in the S&P 500 and made money. Nearly everything went up.

However, maybe you sat on the sidelines in 2020, watching with envy.

If you waited until 2021 to start investing because you heard about the success of others, you might have been a victim of the bandwagon effect. This mental blind spot subjects you to the risk of greed because you want to make money too, and don't want to feel left behind. If that was you, maybe you heard about the fast money people made on GameStop (GME) in early 2021. So, you decided to buy in, joining the meme stock surge on January 27, 2021, closing at $86.88, then rode it down to $10.15 on February 19, 2021. If so, you're not alone. If you bought on its peak trading day (January 22, 2021), investors executed 788,631,00 trades of GME. That's a lot of trades. For comparison, the average number of trades for GME is 10,899,376. If you bought GME any day after January 27, 2021, you bought it too late. But how would you know that? You wouldn't. This is why you need a disciplined approach to investing your money. The risk of riding a bull is that sometimes you get thrown. Even AI technology cannot help you time the market so that you always buy low and sell at a peak.

Institutional investors count on individual investors to make irrational decisions. For example, Warren Buffett, the CEO of Berkshire Hathaway, is known for his value investing approach, which often involves identifying and capitalizing on the irrational behavior of individual investors.

Buffett has frequently observed that individual investors tend to overreact to market news, leading to significant price fluctuations that do not necessarily reflect a company's intrinsic value. Buffet uses "Mr. Market" as a metaphor to describe the stock market's tendency to be driven by emotions rather than rational analysis.

Part of the job of a financial advisor is to help clients identify when emotions drive their thoughts and desire to make decisions. Buffett famously advised, "Be fearful when others are greedy and greedy when others are fearful," highlighting this strategy of taking advantage of market irrationality.

2025 Stock Market
Some people now feel worried about the decision-making by the Department of Government Efficiency and the current administration. You may wonder about the ripple effect it will have on the stock market. But remember, companies have historically found ways to generate profits and reward shareholders in good and bad times. When making investment decisions, you should not feel emotions, especially fear, greed, envy, or worry. If you do feel worried because you need the money to pay your bills, you should not have that money invested in the stock market. The longest recorded bear market cycle to fully recover in the history of the S&P 500 was the dot-com bubble. On March 24, 2000, SPX closed at 1,527.46 and did not close higher until May 7, 2007, marking the full recovery at 1,530.23. An extreme market downturn is why retirees need a plan to avoid selling stocks in a down market to pay their bills.

Remove Emotions from the Equation
Investors need to commit to an investment philosophy and stick to it, regardless of political speculation or market uncertainties. If you don't have an investment philosophy, you can adopt one similar to that of the Hurlow Wealth Management Group. Who believes:

The world is unpredictable, so we base investment decisions on data, not speculation or emotions.
The stock and bond markets produce returns for investors over the long term, despite short-term volatility.
Preserve seven years of withdrawals in bonds to sustain an extreme bear-market cycle.
Diversification helps mitigate risks associated with any single company, sector, or country.
Buy when an asset class is down 20% from its benchmark and sell when it is up 20%.
Focus on what you can control:
- An investment process
- Risk management
- Diversification
- Investor behavior
- Tax minimization
- Cost mitigation

While no one can control the actions of political figures or business leaders, you can ensure that your investment strategy is sound and adaptable to various market conditions.

Managing investment emotions is not easy. Even the late Jim Simons, the subject of the book The Man Who Solved the Market by Gregory Zuckerman and who was dubbed "the world's smartest billionaire" by the Financial Times, fell victim to emotions. On occasions when the fund was losing money, he, too, had to fight his feelings. Sometimes, fear got the best of him, and he overrode his algorithm.

You will likely lose money if you manage your investments with feelings and not rules. If you need a financial advisor to help identify cognitive blind spots or to invest on your behalf so you don't make irrational investment decisions, contact the Hurlow Wealth Management Group for a free consultation. We're here to help.

Sources:
S&P 500 Index (^SPX) Stock Historical Prices & Data - Yahoo Finance
Report of the Market-Wide Circuit Breaker Working Group
The Man Who Solved the Market by Gregory Zuckerman

Services offered through Hurlow Wealth Management Group, Inc., a Registered Investment Adviser. Hurlow Wealth Management Group, Inc. does not provide tax, legal or accounting advice. Advisory services are only offered to clients or prospective clients where Hurlow Wealth Management Group, Inc. and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Hurlow Wealth Management Group, Inc. unless a client service agreement is in place.