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Investing Lessons from 2020

Lessons from 2020

Predictions are worthless, so instead, let’s review some investing lessons from 2020:

1. Don’t fight the Fed OR the government – the turnaround from March lows was mainly a function of Fed intervention and fiscal policy weight.

Return since March 23 2020 Low

2. Have liquidity – you never want to sell equities to raise cash for personal liquidity during a sell-off. Never allow a lack of liquidity to financially break you.

3. Have a cash cushion – this is an associated lesson to having liquidity. A cash cushion is all about raising the probability of success across ALL LEVELS of market risk…therefore decreasing your chances of financial disaster during a crisis.

4. Not losing control of your behavior and emotions – this can lead to financial disaster. You are one of ~7.5 billion people on this planet. You should not be waking up every day trying to outsmart everyone else. Respectfully, I assure you that the probability of you having an investing edge or unique insight is around 01T power.

5. Focus on compounding – compounding good returns is a great long-term strategy – this is a 2020 lesson and a multi-decade lesson. Don’t overthink strategies. Patience and discipline are critical.

Behavior Gap Chart

(With permission of Carl Richards @behaviorgap – thank you.)

6. Be optimisticconfidence about the future is an essential component to the success of your plan. Here’s a chart of how the economy performed over the past 170 years.

The Psychology of Money Chart

(**Thanks to Morgan Housel, a local Alexandria VA neighbor, for the above from The Psychology of Money. @morganhousel)

7. Be distrustful – your plan is unique to you, so eschew the noise, solutions, products, and ideas proffered by other people not associated with your plan, goals, and timeline. They may not mean any harm, but they probably define success differently than you.

8. Use models based on rules, not your gut – things are rarely black and white. Investing, like war, is a perpetual battle between offense and defense. Employ a system to make rational choices and remember to never confuse “buy and hold” with “committed to being invested.”

9. Remember that shit happens – maintain flexibility in your plan, perspectives, and thinking. When things go wrong, look at your plan and assess the real impact on your future. (See #2 and #3 again). As Steve Jobs once said, “You can only connect the dots looking backward.”

10. Have real goals – investing without them is like getting in your car just to drive somewhere. Don’t have any goals? Try this to start: “I want to wake up every day and be able to do whatever I’d like and not have to do anything I don’t want to.” Refine your plan and investment strategy from there.

Planning and investing can be easy to learn but challenging to master. Pay attention to the investing lessons learned in 2020 and apply them to be better in 2021.

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Keep looking forward.

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