2020 Personal Finance: A Year in Review
I think I can safely say that most of us are happy to see 2020 in our rearview mirror. Between the onset of Covid, a crashing economy that led to many people losing jobs, personal lives being turned upside down with kids taking classes from home, parents working from home, sports canceled, political/social upheaval, and the elimination or scaling down of many of the things that bring us joy (travel, eating out, being with friends, etc..) it will not go down as a fondly remembered time. But when things seem at their worst there is always an opportunity to reflect and learn lessons that can be valuable to us in the future and 2020 certainly provided us with many of those. As a financial planner, I would like to take this time to reflect back on the year and see what 2020 taught us about personal finance and what you can use moving forward. 1. Focus on financial fundamentals If you have read my previous posts you may know that I put a big emphasis on financial fundamentals. I like to think of your finances as a pyramid and each level of that pyramid represents a different area of your finances. The concept is that you can’t build a solid structure without having a strong base. In the case of your finances that base is the financial fundamentals which consist of your budget, debt management, and emergency savings. Unfortunately, this year saw a big spike in people losing jobs, being temporarily furloughed, seeing reduced hours, or taking a big income hit due to the Covid impact. Having strong financial fundamentals will help you stay afloat during hard times. Budget: If you are aware of where your money is being spent you are in a better position to react quickly and cut costs in certain areas helping you stretch your dollar during a period of reduced income. Debt management: The major drag with debt is that it comes with mandatory monthly payments. When your income takes a hit this means less income for living expenses because you are still having to make those fixed debt payments. I am not here to say all debt is bad and you should never have any. The key is to keep your debt manageable so that if you have reduced income you still have money left for living expenses. Emergency savings: This is having the 3-6 month of living expenses rule of thumb you always hear about. And you hear about it because it is a really good rule. This protects you from job loss or reduced income. Likely you will still cut back on certain expenses but you can use these savings to still pay for your necessities and not lose sleep at night about keeping a roof over head or food on the table. In general, having sound financial fundamentals keeps you in the position of saying “that sucks”, because you know you may have to cut back or cancel some plans in bad times instead of saying “oh sh*t, now what do I do?” That is not a position any of us want to be in. 2. Have a long term investment strategy While we have been living with some periodic volatile markets over recent history, 2020 presented with the biggest drop in the markets we have encountered since the financial crisis. Fortunately, this drop didn’t last very long and the markets came back with a vengeance and ended the year at all-time highs. For those of you looking at your investments for a long term goal like retirement, 2020 reinforced that the best thing to do is hang in there even when things get dicey and stick to your plan. The long term returns of the market have a very good track record. You might take a short term hit every now and then but over the long haul you will come out ahead. Those that stayed the course were rewarded with a tremendous rally and even a positive return on the year while those that panicked and sold likely missed out on a good portion of the recovery waiting for things to feel safe again. Now, I am not here to advocate that everyone should be all in no matter what. You need to have a portfolio that is constructed to contain the appropriate amount of risk for you and your circumstances. 3. Don’t try to time the market This one is closely related to the previous point. Financial planners give a lot of advice in a lot of different areas but we are pretty consistent with talking about long term investment strategies. We don’t recommend you check your 401k balance on a daily basis because the up and down swings will be too stressful for many people. The key is to make sure that over time you are making the progress you need to reach your goals. Many people though get caught up in the moment and either buy or sell their investments in an attempt to protect against further losses or take advantage of cheap asset prices. As a financial planner, I pay more attention to the workings of the economy and the markets than the average person but none of us know which day will see things turn a certain direction. That is why we advocate patience and to ride out the good and bad as history is your favor for good results. 2020 saw 8 of the 9 single biggest daily gains in the history of the Dow Jones and 8 of the 10 largest single day losses. In every one of these cases, the market moved at least 1,000 points to the good or bad. All but 2 of these 16 days occurred between February 24 and March 26th, a window of just 24 trading days. Had you lost hope after an almost 3,000 point loss on March 16th and gotten out of the market you would have missed out on the 1,050 point gain the following day. While that certainly didn’t get you back to even it was a 5% gain that you would have missed. If you could have guessed right on a daily basis over the course of that month you would have made a fortune but had you guessed wrong you would have lost one too. 4. Be flexible When I create a financial plan for a client that plan reflects data, analysis and recommendations for that specific moment in time. While the initial financial plan is an important document as it provides guidance it is just as important, if not more so, to provide ongoing analysis and recommendations as clients continue through their lives and deal with all the changes that occur as time passes by. The financial plan needs to be thought of as a living document that will change along with the changes in a client’s life. 2020 presented us with change on many fronts. Whether it was how we worked, how we schooled, ate, visited with family. You name it, life was different. Our finances were different too. As a result of Covid related restrictions and lockdowns, we didn’t have as many options for spending money. Instead, we were able to pivot and invest in our health with home gym equipment, make overdue home improvements or set aside money for other long term goals. People’s long term goals may also have changed as a result of what they lived through in 2020. Maybe you decided to live closer to family, came to the conclusion life is too short and want to retire earlier, travel more in the future, or deemed that some other goal is now more important. Your plan and goals are subject to change and that is okay. You just need to know it will have an impact and you will need to adjust accordingly. 5. Be opportunistic This goes hand in hand with being flexible. When hard times hit opportunities are often created. In February and March our markets were in free fall. To help prop up the economy the Fed lowered interest rates. This created multiple opportunities. With lower interest rates, it made financing a new home or refinancing an existing home more attractive. As people were looking to move out of urban areas and into suburbs it resulted in sharply rising home prices in the now in-demand suburban areas and falling prices where people were leaving. For those who have thought about downtown living, it created an opportunity to sell high and buy an urban home at a discounted price. Maybe you were thinking this was a move you would make five years from now but the opportunity was too good to pass up. With the markets dropping by thousands of points at a time it created an opportunity for those that stayed calm and had the strength to buy when things looked dire. They were rewarded with a massive rebound. I previously mentioned not trying to time the market. Being opportunistic is not about trying to find the date when those assets were at their cheapest, that is market timing. Being opportunistic is about identifying an asset you feel is undervalued and you are comfortable getting in at that price. The price may go down further from there and you are okay with knowing in the long run you made a good deal. While I don’t like to promote the purchase of individual stocks, companies like Microsoft, Google, Amazon and Apple which were well positioned to survive the pandemic and whose business wasn’t really hurt by it either saw their value drop by as much as 40%. By mid-June, some of these stocks were at new all-time highs. Those who had the foresight to invest in companies like Zoom, Peloton and other work from home/stay at home companies saw values go up by over 300% in the year. Again, this is not about waiting for Apple to drop 40% before your pounce. You might have looked at Apple dropping 25% and thinking to yourself this is a good price to buy this stock because I am sure it will bounce back. With many of our usual outlets for discretionary spending limited we were able to find other uses for that money. Whether it was shoring up emergency savings, paying down debt, propping up your kids' college fund, adding an extra percent or two to your 401k fund there was a way to make positive strides towards financial goals. I am not calling for taking advantage of other's misfortune here but simply being on the lookout for opportunities that arise when a situation results in either bargain priced assets or a chance for you to make bigger contributions to your own financial goals. 2020 sucked, but if we take the time to reflect we can learn some of our most valuable life lessons coming out of dark times including your financial life. Let’s hope 2021 provides a smoother ride. I’ll be okay taking a year off from learning hard lessons. The foregoing content reflects the opinions of 7th St. Financial, Inc. and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.