Investing

7 Important Stock Market Lessons to Remember in 2021

There are some valuable lessons 2020 taught us about investing. Here’s why you should stay the course.

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Okay, I know we’re all done talking about 2020. But I have to bring it up once more. As the past several months have unfolded, we’ve begun to see some signs of positive momentum, including the economy improving and the stock market continuing to grow.

In this article, we'll reflect on 2020 and cover some vital stock market lessons and resources to remember moving forward.

What 2020 Taught Us

2020 was a heck of a year. But I think it taught us some valuable lessons in investing:

Lesson 1: Stick to the Plan

The biggest lesson from 2020 is to keep investing and stick to the plan. When the market took a nosedive in March of 2020, many people began to panic and panic-sold their stocks for safer investments. This sky is falling mentality later got those folks into trouble when the market rebounded and outperformed expectations for the rest of the year.

If you don’t have a plan, you probably need to start somewhere. Morningstar Premium is an excellent service to help map out stocks (and funds) to buy in various sectors. You get access to analyst reviews of both stocks and funds so you can make a more informed decision on your investment plan.

Lesson 2: You Can’t Predict the Future

We also learned that the future is unclear. You can’t predict it. Who would have expected what happened last year to happen? So we don’t have a better idea today of what the future holds than we did a year ago. Sure, we can speculate, but predictions - both from an investment perspective and an economic perspective - are educated guesses at best.

That being said, it helps to have a professional to help with those educated guesses. Paladin Registry offers a service to help you find a highly qualified financial advisor to discuss your financial goals. Paladin is free to use (advisors have to apply, be vetted and approved, then pay a membership fee to be a part of it). They’ll help match you with the right advisor with whom you can discuss the next steps. See our full review of Paladin Registry for more information.

Lesson 3: The Economy Doesn’t Mean The Market

Historically, we tend to see the stock market move in tandem with how the economy is trending. But last year took that notion and threw it out the window. While the economy was faltering for the most part (including rising unemployment and extreme uncertainty of the future), the stock market was rebounding, bit by bit. So it’s safe to say that we cant draw a positive correlation between the state of the economy and the stock market.

Lesson 4: Performance Is Future Focused

The stock market’s performance is based mainly on the expectations of buyers and sellers for the future - not the past. Historical data is nice to have because it gives us some sense of what may or may not happen, but it’s important to remember that past performance is nothing more than a data point. It does not, in any way, help us predict the future of the market. That relies on consumers’ views of the future.

The founders of The Motley Fool created a service to help look at stocks in a future-focused manner. It’s called Motley Fool Stock Advisor, and with a subscription, you get two premium stock picks every month that have been intensely researched by the two founders of The Motley Fool. They give you in-depth analysis and the reasons behind their picks - which may help you have a more future-focused outlook on stocks.

Read more: The Motley Fool Stock Advisor Review

Lesson 5: You Were (Probably) Tested

As if 2020 didn’t throw enough in your face, you as an investor were significantly tested by the roughly 30% drop we saw in the stock market as a whole. Suppose you didn’t panic-sell, good for you. But that doesn’t mean you didn’t want to throw up some days looking at the significant market declines. The lesson here is that we as investors were tested - and this is a good reminder that the market fluctuates constantly, and we have to stay the course.

Related: How to Know If an Investment Is Too Risky

Lesson 6: Diversification Is Critical

We also learned that diversification is critical. While some industries were faltering (think airline and hotel), others were booming (like small-cap stocks and tech companies). This is an excellent display of the reasons why we need to diversify our investment portfolios. By having too much weight in one sector, you risk a boom or bust outcome - which isn’t helpful for a long-term investor.

If you need help diversifying your assets, you might want to talk to a financial professional. SmartAsset offers a service (it’s free) to match you to a financial professional based on your financial situation and goals. After completing a somewhat in-depth questionnaire, your responses will be reviewed, and SmartAsset will match you with a handful of qualified advisors.

Lesson 7: Trying to Time Mr. Market Is Fools Gold

Those of you who have read The Intelligent Investor by Benjamin Graham will know what I mean by Mr. Market. In his book, Graham says that Mr. Market (referring to the stock market) can be grumpy and unpredictable. So you should never try to predict him. In simple terms, Graham is saying the market is (wildly) unpredictable, so trying to time it is impossible. So your strategy shouldn’t hinge on timing the market. You’re likely to lose in the long run (especially if you’re a novice investor).

Related: Why Time in the Market is More Important Than Perfect Timing

Looking at 2021

Now that we’re into 2021, it’s time to remember those lessons from last year and shift our focus to the future. Here are some things to keep in mind for 2021:

Many Challenges Lie Ahead

We are still feeling the impacts of what happened in 2020. And while progress has been made, we still have a long way to go to make a full recovery.

That said, we are on the road to recovery. So it’s best to focus on that and use that mentality when investing. Think long-term, not right now. Just know that the country still faces many challenges ahead.

Keep Your Focus Long-Term

The market had risen significantly from its low point a year ago. And that rise has continued to remain stable. The outlook is positive, and at least a few experts expect to see continued growth this year (along with some expected hiccups).

It’s going to be essential to have a long-term focus, though. Like last year, we don’t know if we will see a sudden drop in the market. For people expecting nothing but positive news this year and beyond, that might be a shock. So it’s important to stay diversified and resilient to market ups and downs.

This needs to translate to your investment strategy, too. If you’re thinking short-term and buying stocks that are hot or even investing in something like cryptocurrency, make sure you balance that out with several long-term investments like index funds, blue-chip stocks, bonds, etc.

One way to manage this passively (and remove the worry) is to choose a robo-advisor like Wealthfront. Wealthfront allows you to select a risk tolerance and it will craft a portfolio of low-cost ETFs for you, then manage it on your behalf. Wealthfront also has a Cash Account that you can use as a checking account, so they can be an all-in-one bank if you want.

Stick to the Basics

My advice, take it or leave it, is to stick to the basics of investing, especially this year. For me, that means investing in low-cost ETFs and index funds. Yes, it’s boring, but choosing a more basic, passive investment approach allows you to do a few things:

  • Focus on other things (like your family, job, or other life issues)
  • Save money (ETFs and index funds are notoriously low-cost)
  • Stay diversified (remember that index funds are like a basket of thousands of stocks)
  • Go where the market goes (that means up or down, so you’re not stressed out trying to beat the market)

I realize that in a time when stocks like Gamestop are making headlines, and people are rushing to buy cryptocurrency, this advice seems a little mundane. I get it. But I strongly advise you don’t buy into the hype. Sure, you might make a quick buck, but that type of gain isn’t sustainable. And creating a repeatable process for duplicating those returns is nearly impossible.

So my advice, at least for 2021, is to stick to the basics. For me, that’s boring funds. For you, it might mean blue-chip stocks, a robo-advisor, bonds, or something else. I don’t think this is the year to try and get cute with your investment approach.

Other Things to Remember

Outside of those significant three factors, here are a couple more quick things to remember for this year:

  1. Don’t panic. If you’re prone to emotional ups and downs, that’ll translate to investing. Stick to data, not gut feelings, when investing. If you can’t help yourself, it might be best to work with a pro.
  2. The market is resilient. Last year, we all changed the way we work and live. Most of us work from home now and have meetings with Zoom or Teams. Despite all of that, the economy is climbing back, and the market has already come back.
  3. Things will continue to move forward. Warren Buffett's saying that successful investing is about being "greedy when others are fearful and fearful when they are greedy" holds true. Fear drags everything down and creates an opportunity to buy stocks at a discount. Even if fear drives stocks lower, the market will move forward at some point just like it always does.

Final Thoughts

Let’s face it - 2020 was not a great year for many of us. But it has now passed, and we have an opportunity to focus forward in 2021 and beyond. While our overall view of things may have shifted, the core fundamentals of investing remain the same. And 2020 was just a reminder of some of those things. Focus long-term, stay the course, and you’ll do just fine.

Related: How to Find Undervalued Stocks


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