2020: Crossing the Finish Line
The Power of Process
By Steven Higgins, Financial Advisor
New Year’s Eve of 2020 saw major stock market indexes notch all-time highs* as investors, novice and expert alike, struggled to make sense of the freakishly wild and sometimes unexplainable calamity that was the stock market in 2020. As imagery goes, I feel like if Alfred Hitchcock guest directed an episode of The Twilight Zone it would have looked like investing in 2020. And what a year it was for our investment process! In the final trading moments of the year while most people were dovetailing back-to-back holiday weeks, Higgins & Schmidt Wealth Strategies executed our seventh and final tactical rebalance of the year. With the conclusion of the election in November and news of better than expected vaccine trials following closely after, the stock market ended the year with the regular news of record highs. As part of our investment process we reduced stock positions as the stock market moved incrementally higher just as we increase stock positions as the market moves lower. The purpose of our tactical rebalance process is to maintain our target allocations as the market moves higher or lower. We want to make sure that when the market is high, our clients aren’t taking on too much risk and when the market is low, we want to make sure our clients have the correct allocation to benefit from the recovery.
Along with our tactical rebalance in December, we adjusted some of our weightings in certain asset classes. We made a slight reduction to our large cap growth exposure. We also took steps to further guard against interest rate and credit risk on the fixed income side of the models by removing allocations to high yield bonds in favor of alternative asset strategies. To address income planning for our retired clients, we created six month’s worth of income reserves to increase our client’s short term liquidity. We made this move in order to maintain their income goals in the event we experience normal volatility as we continue to work through and ultimately recover from the Covid-19 pandemic and economic aftermath.
2020 saw our investment process put into action in a way that we haven’t seen before. The year was essentially a laboratory test of a process in the face of chaos and uncertainty. Here’s a summary of all seven of our tactical rebalances of 2020.
January 2020 – Rebalance 1
The first tactical rebalance came in the form of a stock reduction in mid-January as the market continued the upward trajectory it displayed during 2019. While we certainly didn’t know that Covid-19 would take over the narrative in the following month the move proved to be quite beneficial for our clients. The S&P 500 ultimately set an all-time high on 2.19.20 only to turn over and plunge 34% by late March.*
March 2020 – Rebalances 2-4
While nowhere near historical in its depth, the correction was the fastest peak to trough 30% correction in history. Again, our investment process went to work. As the S&P 500 broke the first -10% threshold, we made an incremental increase to stocks in our portfolios. Just two weeks later, the S&P 500 broke through the -20% threshold again, triggering an increase to stock positions. On Friday, 3.20.20, the S&P 500 plowed through the -30% threshold. All signs were that the stock market fall driven by pandemic fueled paranoia wasn’t anywhere close to applying the breaks on the free fall. The S&P 500 set its correction bottom at -34% the following trading day after our fourth rebalance wherein we increased stock allocations. The next week witnessed the market turn off of the market bottom. April was nearly the best month in market history and May saw impressive gains as well. By the of May, the S&P 500 had rallied 36%.*
June 2020 – Rebalance 5
With the S&P 500 having recovered a significant amount by June and our models due for routine maintenance, we executed a rebalance essentially returning our models to the original pre-Covid target allocations. With our clients fully invested, they were well positioned to benefit from the continued recovery throughout the summer.
September 2020 – Rebalance 6
In September the market paused its meteoric recovery as investors pondered the status of the pandemic and the looming presidential election. On 9.23.20, the S&P 500 ever so briefly breached the -10% threshold setting in motion our sixth tactical rebalance of the year. We increased the allocations to stocks in our models and by mid October, the S&P 500 was nearly fully recovered* from what turned out to be a a brief pause in what would be a very good finish to the year.
December 2020 – Rebalance 7
The combination of the culmination of the election, better than hoped for vaccine trial outcomes, and the anticipation of further stimulus was too much for investors to ignore and the the end of the year brought stock market records that certainly seemed well out of reach nine months before. With the S&P 500 more than 10% above* its previous all-time high we executed a rebalance of our models returning them to the target allocations.
2020 was unique in too many ways to mention here. However, from an investing and financial planning standpoint, the year illustrated the power of process. Too often emotions take the driver’s seat amidst chaos with the aftermath being regretful and expensive. Our process was designed to exclude emotions entirely. Our process was developed to work as part of a system that includes, financial goal planning, income planning, and tax management with the singular objective of guiding our clients to the successful pursuit of their goals.
As we move in to the new year and we collectively lift the veil on what we all hope to be an emergence and successful recovery from the pandemic that has defined life for so many over the past year, we are staying resolute and keenly focused on ever present potential volatility. We will continue to deploy our processes when necessary and refine the processes in the mean time. Thank you to our clients for the steadfast trust and support you showed us during the storm. As important as the process is, the relationships underlying all that we do is what truly makes all it work.
*S&P 500 data obtained from ycharts.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
