2020 has been a rough year for investors. When the coronavirus pandemic first hit in March, shareholders saw the value of their portfolio plummet by as much as 40%.
The stock market recovered soon afterwards.
Veteran investors have probably experienced similar corrections in the past. But young and novice investors may have been experiencing this sudden downturn for their first time.
Whether you had a great year in 2020 or missed out on some prime opportunities, we can all learn a lesson or two about investing in stocks. Here are three things 2020 has taught us about stock investment.
Brace yourself for surprises
In 2019, the S&P 500 gained 28.5%, one of its best performances since 2013.
Based on these stats, many investors had hoped that the market would somehow correct itself in early 2020. No one anticipated that a pneumonic plague would result in the shutting down of a considerable portion of the economy.
On average, the long-term return on a stock is about 8%. But, to earn a decent return above your risk-free interest rate, you have to be ready to take on a few risks.
In the past two decades alone, the stock market has experienced several catastrophic events. There was the housing market crash that led to the Great Depression in 2008, the China-US trade war in 2018 and of course, COVID-19 pandemic in 2020.
Take these market implosions as the small price you have to pay, to earn the long-term rewards of investing in stocks.
Be patient for the long-term rewards
In March, stocks fell sharply as coronavirus began to spread rapidly between and within countries. The disease dealt a huge blow to the stock market, causing it to crash.
By mid-March, the Dow Jones Industrial Average had dropped by 12.9%, the S&P 500 by 12% and the Nasdaq Composite by 12.3%.
Based on this, no one had expected the market to rebound as fast as it did.
Despite the rocky year, the stock market is set to close on a record-high. According to the MSCI World Index, the global stock market has gained by 12% in 2020, after a 68% dip in March.
This proves that if investors had just held onto their plan of purchasing high-quality stocks at regular intervals, they’d be reaping profits as the year ends.
Tech stocks are a winning bet
If there’s one thing that 2020 has taught us, it’s the fact that tech stocks are a goldmine. The coronavirus pandemic has shed light on just how profitable the technology and biotechnology industries are.
The returns from these two sectors have taken off this year, with the majority yielding returns above the average market.
In a bid to curb the spread of the virus, many corporations adapted a work-from-home model. This practice allowed several technology securities- such as those in cloud storage, video conferencing and entertainment- to not only stay afloat but also soar.
Shares in video conferencing platform Zoom (ZM.Q) and video-streaming service Netflix (NFLX.Q), surged by 425% and 60% respectively. Similarly, shares of Peloton (PTON. Q), a workout streaming service, increased by 350% from December 2019.
The biotechnology space has also experienced remarkable gains.
The invention of mRNA technology enabled big pharma companies like Moderna (MRNA.Q) to develop a vaccine in just 10 months. Consequently, its stocks experienced massive gains, up to 600% this year.
These golden principles have remained true in 2020, and they’ll probably hold in 2021 as well. Don’t try to time the stock market. Pick your investments wisely. And once you do, hold on to them patiently; don’t go with the herd mentality.