Updated: Feb 2, 2021
Looking back on a market review of 2020 and the Q4 Market Review, five Investment Insights become clear take-aways from this past year:
1. Resilient in Tumultuous Times
Despite tumultuous and unprecedented events, people, institutions, and financial
markets proved resilient in 2020 while stocks experienced significant swings of highs and lows with the challenges of pandemic and political events in 2020. For example, as the pandemic worsened in March, the global stocks experienced a significant drop, but then rallied back and ended the year in positive territory. (See more in Dimensional's analysis of the year in the 2020 Market Review or see more information in our Q4 Market Review).
Resilient investors who stayed the course toward their long-term investment goals despite the upheaval in the economy, reaped the rewards of a disciplined and broadly diversified investment approach.
2. Stocks Divorced from Reality?
Some investors may wonder how the news can be so bad, while stocks seemed to perform so well. Despite the discouraging headlines, market indexes respond to new information, and many global companies not directly affected by the virus posted significant gains last year. Through the pandemic, some businesses are prospering while others are floundering at any given point in time, so the stock market reflects this new information all the time. The phenomenon of why stocks may performing well while the economy seems to decline is explained in a recent article, “Is the Stock Market Divorced from Reality?” That is why while new information and market fluctuations can constantly affect markets, and while the economy can look bleak, wise investors remember to look toward their long-term horizons.
3. Small Company Stocks were Big Winners this Quarter
In US stocks, International Developed Stocks, and International Emerging Markets Stocks, Small Company Stocks outperformed Large Company Stocks. Diversifying to include more than just Large Cap Stocks in a portfolio demonstrated the biggest gains this fourth quarter posted by Small Value, Small Cap and Small Growth. (See full Report here)
4. Focus on the Future & What Hasn't Changed
Investors can focus on what hasn’t changed, according to this article from Weston Wellington, a VP at Dimensional:
Markets are forward-looking, so today’s economic data is like looking in the rearview mirror instead of the road ahead.
Broad diversification can help to increase the chances investors capture market returns.
Portfolio strategies designed to weather both the expected and unexpected may be less stressful and easier to stick with.
5. 20-20 Hindsight in 2020 Rewarded Long-Term Investors
No one could have predicted the tumultuous times we are seeing, and the years to come will continue to provide challenges to markets. However, in the hindsight as perfect as 20-20 vision, we learn the importance in 2020 of sticking with a consistent plan and diversified portfolio.
For example, investors who reacted by a move to cash in March would have missed the gains over the next several months.
Likewise, we see the importance of staying broadly diversified across companies and industries. While the impact of the COVID-19 pandemic hurt some industries such as airline, hospitality and retail, other companies such as online shopping, technology and communications performed well.
Overall, 2020 while filled with unprecedented trying circumstances and events, still rewarded investors who were committed to their long-term plan.
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