By Nick Maggiulli
While many of us want to leave 2020 in the past (myself included), it was a year filled with investing lessons that will benefit us for decades to come. Below I have compiled a list of 10 such lessons that you can use to be a better investor in 2021 and beyond. Enjoy!
1. Prices can always go lower
Even when things seem like they can’t get any worse, sometimes they do. Energy traders discovered this truth the hard way when spot oil prices went negative for the first time ever:
I don’t think I ever remember FinTwit being more shocked by a single event. The lesson here is simple: even when you think the bottom is in, prices can always go lower. Sometimes you have to expect the unexpected.
2. The bigger decline, the bigger the potential recovery
If equity markets demonstrated anything this year it was that large price declines have the potential for even larger recoveries. Why? It’s simple math. If a 20% drop in prices requires a 25% recovery to get back to even, then a 33% drop in prices requires a 50% recovery to get back to even, and so forth:
And since 2020 witnessed a 33% decline in the S&P 500 (from peak to trough), this means that the unexpectedly quick recovery was even better for those that got in near the bottom in late March. While no one could have predicted that such a recovery would follow, the fact that a recovery did follow meant huge gains for those who stayed the course.