Markets

Lessons for Investors from the Four Years Since the Pandemic Low

Lone figure walking through Reagan International Airport
Credit: Kevin Lamarque - Reuters / stock.adobe.com

This week four years ago, you may recall, the market hit its pandemic low. Everything looked extremely bleak at that time, not just in the market but in general. Most of the world’s people were locked in their houses, venturing out only to buy food and other essentials that we then carefully sanitized down when we got them back to our homes, and the global economy had basically come to a standstill.

There is some controversy now as, looking back, that all seems it may have been a massive overreaction, but there is no telling how things would have panned out had the lockdowns and other precautions not been instituted. My dealing room training kicks in at a time like this, and rather than look back and criticize what seemed like a good idea at the time, I simply look at what was, and is; I don't speculate on what might have been. Then I ask: What can we learn from all this?

That same training makes me look first at the chart since that low was hit on March 23, 2020, and there are several obvious lessons there.

4 year chart

The first and most important is that long-term investors, no matter how disastrous things may seem at any given time, must resist the urge to panic. The U.S. system -- in fact, capitalism in general -- is remarkably resilient and an inexorable trend towards growth over time is built into it.

The S&P 500 has not just completely recovered from that massive shock, but has powered up to all-time highs just four years on. In fact, it hit a record in January 2022, less than two years after the low, suggesting that the bigger and sharper the drop is, the bigger and faster the bounce will be.

With hindsight, it is now obvious that rather than selling on that rapid drop, we should have been buying.

Of course, not everything recovered so quickly. Indeed, some companies never recovered at all. However, those that went under in 2020 were generally companies that were already struggling going into the crisis, either in terms of their finances or because they were in industries that were in the process of being surpassed by technological advances. That is the second lesson from the events of the last four years: that crises effectively cull the weak from the herd.

The obvious implication of that for investors is that in many ways, the past performance of a company and its stock is irrelevant. What matters is the future, and if a company is not in a position to take advantage of shifts in the economy, they will fail at some point. That may be because their industry is dying, as was the case for some large-model brick and mortar retailers, or it may be because they have weak balance sheets, leaving them no room to cope with the stress of a crisis. Most likely it is a combination of those two things.

The future, however, is rarely clearly defined in the mind of an investor, which makes picking winners and losers not just hard, but usually impossible except maybe by luck. That is why diversification is so important. By all means invest a portion of your wealth in individual stocks in which you believe, but the core of your portfolio should be in index funds or, at the very least, spread out among a good number of stocks throughout different industries and styles.

The argument against that strategy is that you miss out on the opportunity for really big, life-changing kinds of gains. However, things are different following a big collapse, and great returns are attainable with more conservative, diversified investments. After all, over the last four years, the annualized return on the S&P 500 has been 25%, and more than doubling your money in four years is pretty good, however you look at it.

Basically, the lesson for investors from the last four years is that the boring stuff that financial advisors and successful investors like Warren Buffett have been telling us for years is true. For long-term investors, a big drop in the market should be a buy signal, not a sell signal. When you are taking on risk in that way, you don’t need to accentuate it by overcommitting to a small number of stocks because the major indices will all offer good returns on a bounce back, without the risk of denting returns significantly by getting something wrong.

It is a curious blend of embracing risk by buying into chaos but reducing it by buying something relatively stable. Ultimately, though, the most important lesson of the last four years is that in stressful, uncertain times, the tried and tested rules of investing -- don’t panic, buy on a drop if you can, and stay diversified -- are more important than ever.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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