4 Stock Market Lessons the Coronavirus Has Taught Us

At the date of this writing, Monday August 24th, the S&P 500 has just closed at a record high. While this is exciting to most “buy-and-hold” investors, many investors also understandably perplexed. In the face of massive unemployment and the coronavirus pandemic that is still ending the lives of thousands worldwide everyday, why would the stock market be performing well?

Lessons are always easier to learn in hindsight when the turbulence has calmed down a bit. I’d like to take a few minutes to share what I feel to be some important lessons about what the market’s performance since the pandemic began should be teaching us. Hopefully this will give us all a feel for how we might better “behave” when the market swings up and down in the future.

Stock market performance looks to the future

Most people aren’t really sure what the stock market is telling you when you see it rise or fall on a particular day. It’s important to understand that stock market performance isn’t an indicator of what happened in the past, but what buyers’ and sellers’ expectations are for the future. Renowned investor Benjamin Graham famously said “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” The day-to-day ups and downs are reflecting what investors as a whole think future performance of the stock market will be.

Large market drops will test you as an investor

At the market’s lowest point so far this year in March, the overall U.S. stock market was down about 30%. It’s important to consider how this decline made you feel as an investor. Did it keep you up at night? Were you cool as a cucumber? Did you sell your investments until the future became more clear? Research shows that most investors at the large brokerage houses like Fidelity and Vanguard didn’t flinch (they held their investments rather than selling). It turns out the unflinching investors were rewarded.

Diversification is key

To this point we’ve been talking about the U.S. stock market’s significant fall and subsequent rise, but for the well-diversified investor the stock market only makes up a portion of your investment allocation. Most portfolios should have part of their allocation in U.S. government and corporate bonds (and perhaps international bonds as well). How did U.S. bonds perform? While bonds also experienced a significant drop in March, it was only about 10% (as measured by the Vanguard Total Bond Market ETF (symbol BND)) and bonds have since returned to their previous pre-pandemic values. Therefore a 50% U.S. stock portfolio and 50% U.S. bond portfolio would have experienced a 20% drop compared to a 30% drop were it 100% invested in U.S. stocks.

Trying to time the market is a fool’s errand

I was at lunch with a friend a few months ago and he shared with me his broker’s decision to move his investments into cash, concerned that a “double dip” plunge in stock prices was inevitable. As the market climbed, my friend wondered if his broker knew what he was talking about. “Hold tight, it’s gonna happen!” came the confident reply. It never did. I’m not sure where my friend’s portfolio currently stands, but I wouldn’t be surprised if it was still in cash having lost out on a complete recovery. Market timing is really hard for lots of reasons. One that makes it especially difficult is, to do it just right, you have to actually get two decisions right: Sell when the market is at its peak, and buy when the market is at its low. Good luck.

I hope this article has been a helpful reflection of how markets behave (in the short-term, it’s almost always a “betting machine”), and how we can best behave as a result. Investors tend to perform better when they invest toward a specific goal and time horizon, using a low-cost, well-diversified investment allocation and riding out the ups and downs.