A contributed perspective by Stephan J. Hess, CFP
Editor’s Note: This is another installment of a monthly series of contributed pieces addressing financial matters.
I think most people are going to be happy now that 2020 is over. This year will stand out and be remembered for many unique events. It will be interesting to look back in five to 10 years and see how it has aged. 2020 was also an emotional rollercoaster that just never seemed to stop. I have even heard that someone released the “Kraken,” whatever that is. For the most part, people prefer consistency and certainty over chaos. None of that happened in 2020 and personally, I would really appreciate a couple of boring years to recover. Let us take a moment, however, to highlight some of the financial topics worth noting, and see if there are any good takeaways, because there always are.
The biggest news is that somehow the stock market had a great year. The Dow Jones Industrial Index crossed 30,000 for the first time recently and all the other indexes hit new record levels too. Considering that in March the index dipped down close to 18,000 points, this record rebound seems wholly inconceivable, but amazingly it did happen. The economy literally shut down in March and entire industries went on economic life support. How do you just recover from that? We have tackled the apparent irrationality of this in the past, so we will not dwell on it any further, but here is something additional to consider. Markets are supposed to accurately and efficiently value assets by incorporating all publicly available information. In theory they should always reflect the prevailing wisdom. Traders and analysts often comment, however, that when the markets move contrary to public opinion, they are just trying to tell us something. Perhaps the market has another plan, and no one told us.
The Takeaway: It is more important to listen to what the markets are telling us, rather than to have our own personal predictions lead our decision-making. Not doing so can lead to costly mistakes. Those who held firm were well rewarded in the end, even if they had no plan.
In 2020 people were forced into an alternative relationship with their money, and something unexpected happened. It turns out that when you swipe your credit card less, you spend less and have budget surpluses. Some people already do better at controlling that involuntary swiping motion, but most people cannot. Often people tell themselves that their extra purchases are ok, and that it will all just work out in the end. The behavioral changes that we all adopted to stay healthy and manage our hospital resources turned out to be great for our budgets. People saved money and eliminated debt, therefore significantly strengthening their financial pictures. Spending did occur though, but not in the same places as before. Home improvements and large-ticket items saw a real spike this year. Forced financial discipline has turned out to be a good thing, even though the businesses and employees who were dependent on our continual swiping have suffered greatly.
The Takeaway: Unnecessary daily purchases add up to more than we think and limit our ability to address our larger financial needs. It can also reduce financial security and add unneeded financial stress to our lives.
Consumer and business confidence remained incredibly strong throughout the year. Confidence is a good indicator of whether individuals and businesses are going to continue opening their wallets to spend and invest. These are key drivers of economic activity and analysts watch confidence levels closely to predict future trends. The indicators flashed yellow a couple of times, but they never turned red. Our economy has been strong and growing consistently for the past 10 years. That is a ton of kinetic energy, and according to Newton’s first law of motion, a body in motion tends to stay in motion. How much energy would it take to slow a mile-long fully loaded freight train by 1 mph. I have no clue, but what would happen if tied my Subaru Outback to this train and slammed on the brakes? Is my car just a bug hitting a windshield or the iceberg hitting the Titanic? I’m guessing the bug. Also, you never want to “Fight the Fed” as they say. Two massive infusions of federal stimulus added a lot of confidence and fuel. This pandemic “ain’t over” yet, but so far, the economy has rejected everything thrown at it in the last 10 years.
The Takeaway: If the latest big news event or crisis does not materially change the momentum of the larger economy, then it is not really a serious long-term threat despite how scary something seems. It may shock the economy but not sink it.
Housing shortages across the country and low interest rates once again spurred a level of housing demand not seen since the mortgage crisis. Some of that demand apparently came from people relocating from big cities, but mostly, record low rates made purchasing or upgrading a house affordable again. Bidding wars and houses being sold the day they are listed are back. When this happens, prices tend to respond quickly, rising higher and higher. There is no telling when it will level out, but someone is always left holding high priced real estate that they wish they did not.
The Takeaway: The fear of missing out (FOMO) can be strong, so be careful about chasing prices and locking yourself into something that is financially ill-advised.
I heard someone once say that we all just need to get over ourselves. It is tempting sometimes to think that we have special analytical skills, and that maybe we can see things that others cannot. The theme with all these takeaways is that it is easy for us to draw our own confident conclusions about our spending and investing. I am not saying we are not intelligent. Gathering information, leaning on our experiences, and carefully connecting the dots usually serves us well. My only word of caution is this: be sure to leave some space in your thinking for the very real possibility that your irrefutable self-generated conclusions could be off. In fact, it could be way off. Financial firms spend millions of dollars trying to figure things out and even they don’t know for sure what is going to happen. It is fun to speculate and have opinions about future events. There is generally no harm in that, but when you go all in on an outcome that in your mind is 100% certain, watch out. Before you act on this, take a step back. Acknowledge that there is a high probability that the markets and the economy could very well have a different agenda. 2020 has given us numerous examples of why there is risk in listening to that emotional voice in our heads.
Stephan J. Hess, CFP®, is a CERTIFIED FINANCIAL PLANNER Professional and is the owner of Hess Financial in Harrisonburg. Neither he nor his company has any financial relationship with The Citizen or its publishers.