The long-term is always much easier to visualize when looking back than looking forward. The past 10, 15, or 20 years seems like a cakewalk with the benefit of hindsight but even the next year seems impossible to handicap if we’re all being honest with ourselves.
Even without the ability to forecast the future, here’s my take on what to expect as an investor in the year ahead.
Heading into 2019, investors were licking their wounds from last December’s mini-bear market, a 20% drawdown in the S&P 500 that bottomed out on Christmas Eve. Many assumed the stock market tumble was a warning that the economy was heading for a slowdown in 2019. Add that to the fact that bond yields remained low by historical standards and there weren’t many signs of optimism heading into the year.
So, of course, markets went gangbusters as stocks went on a tear and, spurred on by falling yields, bonds were up big as well. The market is never easy to predict, but it’s especially difficult to forecast over the short-term because investor emotions can cloud our vision.
There’s no way to reduce the inherent uncertainty about the future or know exactly what it holds, but I am fairly certain that the following 10 things will happen in the coming year:
1. Your results in 2019 will impact how you feel about the markets in 2020. The recency bias affects us all in some way. Following the downturn at the end of 2018 many investors were gun-shy following a spell of poor market performance. This year is different in that anyone that was long risk assets should be feeling pretty good about the way things transpired in 2019. Stocks were up. Bonds were up. Gold was up. It would have been pretty hard to lose money last year unless you bet against the upward trend. But those gains can lead to overconfidence as we tend to blame others when things go poorly—or, pat ourselves on the back when things go well—when it comes to money matters. And we tend to use our most recent experience as a baseline for what will occur in the future, often to our own detriment.
2. Something will happen that doesn’t make any sense at all. There’s sure to be something that catches investors off-guard in 2020. Something is bound to defy expectations whether it involves geopolitics, irrational market movements, corporate takeovers, huge gainers, huge losers, or any number of crazy news, events, or performance moves. I’ve learned I’ll almost always be surprised by markets to some degree. So the trick is to not be surprised that you’re surprised because these things can be completely random at times.
3. When stocks run into a rough patch it will feel more comfortable to do something rather than nothing. Doing something, anything, during big market moves, can make investors feel better about themselves because it gives us the illusion of control, whether those moves are necessary or not. Grabbing the wheel, so to speak, when things get hectic will always feel like the right move because making portfolio changes offers a release valve. It’s during these times that patience is rewarded more than ever.
4. There will be other people getting richer than you. Fear and greed often influence investors into making mistakes with their money. But envy is probably a more destructive force. Seeing your peers, friends, or even perfect strangers making money faster than you can cause some strange emotions and reactions. This is true in down markets as well. Someone is bound to put on the right hedge or trade at an opportune time. When that happens you will always regret not doing the same
5. Your asset allocation will likely have a bigger impact on your performance than your security selection. Stock-picking is more exciting, but even if you pick the very best stocks in the worst sector, country, region, or risk factor it probably won’t matter in terms of your overall performance. Asset allocation isn’t as sexy as security selection but it will almost always be the most significant part of your performance attribution.
6. The best investment you can make will likely be an increase in your savings rate. You have no control over market returns, tax policy, elections, economic growth, or the actions of other investors. But you do control how much you save, which is typically the most important investment decision you can make. This is boring advice but for those who are worried about the prospect for lower returns going forward, saving a little more is the most proactive move you can make.
7. There will be a stock, fund, strategy, or asset class that skyrockets that you wish you owned more of. Every year there’s something everyone wishes they would have put all their money into so they could earn enormous gains. It’s fun to dream about owning a lottery ticket stock, but you’ll only know in hindsight what the perfect portfolio or investment would have been over any given year.
8. You won’t be able to distinguish between luck and skill in anyone’s investment results. People will be right for the wrong reasons, and wrong for the right reasons. But markets don’t care about these things over shorter time frames. Over any given year, a great strategy can produce subpar results while a terrible one can produce phenomenal results. Bad decisions get rewarded all the time, but luck doesn’t last forever in the markets. Eventually, a good decision-making process will win out but over a one-year time frame anything can happen.
9. Diversification will make you feel silly. Any long-term investment strategy is bound to make you feel foolish over the short-term. This is especially true at market extremes as the limits of your patience and discipline are sure to be tested. Diversification is for patient people, and that requires ignoring those market environments that make you feel like an idiot for spreading your bets and managing risk
10. Everything will look obvious after the fact. The fact that stocks have rocketed higher and interest rates fell like a rock in 2019 feels pretty obvious in hindsight. Who couldn’t have seen this coming what with all the central bank easing? Hindsight makes the past look more explainable than it actually was while uncertainty seems to always be at an all-time high about what’s going to happen in the future. But that’s always been the case and will always be the case. No one can predict the future but we can all craft beautiful narratives about the past. Whatever 2020 has in store for us, it will only be clear with the benefit of hindsight.
This piece was originally published at Fortune. Re-posted here with permission.