The year 2020, a year filled with tragedy, anxiety, struggle, and financial hardship. The year started with political and military tensions in the Middle East, then to a global pandemic, and a massive market crash as the whole country pretty much shut down. Civil unrest followed in parts of the country due to racial tensions, inequality, mask wearing, and the Presidential Election. Does this sound like the backdrop of massive stock performance in 2020 to you?
The economic future looked bleak in March and April this year with certain market index indicators falling over 20% this year. Coupled with significant job loss and many businesses were shut down. Evictions were paused, home owners were applying for forbearance and extensions. Student loans are still paused. Schools went remote, and some are still remote due to recent surge in COVID-19 cases.
There was also a contentious Presidential Election where President Trump came down with COVID-19 weeks before the election. There were many civil rights protests across the country protesting unfair treatment of minorities across the USA. This doesn’t sound like a country with a booming stock market… or does it?
Stock Performance in 2020
Let’s look at some numbers. The stock market in general was on fire this year! Many experts have been predicting it’s downfall for years. I remember when I made a big plunge in the market when the S&P 500 hit an all time high of 2000, experts were predicting doom and gloom. That was in 2014-2015 time frame. 2000 was a huge number back then, everyone thought it was way overvalued. The S&P ended this year at 3,756- almost double in 5 years.
Now when looking at stock performance, I am very well aware of the risks of a downturn for an entire year, or even a prolonged neutral position. However, if you look back to my post earlier here where I detailed that we cannot predict the future. Innovation doesn’t care about politics, or the bad things that are happening- take 2020 as an example!
S&P 500 Returns in 2020
The S&P 500 for those who don’t know essentially in a fund that measures the 500 biggest companies in the USA across many different sectors. This is a good gauge of how the large companies are doing in the USA. According to macrotrends.net, the S&P 500 returned 16.26% in 2020!
If you were to just look at this table, you would never have guessed of the hardships of 2020! Heck, even the New Year’s Eve parties in NYC were essentially cancelled! With the average being around 10%/year return on equities, 16% is phenomenal!
If you look at the ticker above for the Fidelity S&P 500 Index Fund, it gained 17.63%! There is a slight variation to the SP500 returns posted in the above chart; this is likely due to returns in the form of dividends that funds pay their investors.
If you invested 100K at the beginning of the year in this fund, and did not sell during the big crash, you would have made over $17K by doing nothing. This is a completely passive investment.
Note: I am not advocated for one fund over another. Please do your due diligence on whatever you invest in. I am a guy on the internet and this blog is for educational and entertainment purposes.
Total Stock Market Returns
Many Index investors will advocate for a total stock market index fund. This fund not only covers those 500 big companies, but all the small and medium size companies too. You are essentially owning the USA economy. Let’s take a look at how those funds performed in 2020.
If we take a look at the fund above we see a whopping 20.78% investment performance! Remember all those nasty and scary things we talked about at the beginning of the article? Well now we have a 2X average return for this total stock market fund! You would have made over $20K on your $100K invested in 2020.
Just a quick reminder, both of these funds are completely passive! They don’t require you to do anything! Also, they are diversified among hundreds of companies whose entire purpose is to innovate and generate returns for shareholders.
Did I Miss the Boat?
No. Remember that story I was telling you about how many were concerned that the SP500 was nearing 2000 and due for a major correction? If fear would have stopped me then, I would have missed out on around a 15% Year over Year return in the last 5 years!
Remember, when we are investing in the stock market we are looking at least at a 10 year time horizon. Many experts are calling the gains of 2020 nonsensical, and due for a rebound. Maybe they are right, but who knows!
What I do know if that in 30 years, stocks will be substantially higher than they are now, and they will keep growing yearly. We may have some rough years and times ahead of us, but I am optimistic on the returns that I will get from my index fund holdings long term!
Take a look at VTSAX over the last 20 years. If you took a look in 2005, the fund actually lost 6% after 5 years! A far cry from what is happening today. However, look at that $28.59 fifteen years later- sitting at 94.74! It is all relative, and we don’t know what the roller coaster is going to look like; other than eventually going up!
Real Estate Returns in 2020
This is really a tale of two cities for 2020. There are many stock indexes that track real estate returns nationwide. These in general struggled in 2020. However, nationally there is a housing shortage and prices are skyrocketing and rent is growing steadily too.
In my opinion, owning your own real estate is the best way to go. House hacking will also demolish this amazing Stock Performance in 2020!
If we look at the Vanguard Real Estate Index Fund, for 2020 it was down -4.8%. In my opinion this is due to the large number of commercial real estate funds/companies that are losing rent from many companies shutting their doors, and also many companies who are facing shutdowns not able to pay rent. Along with the eviction moratorium, however that arguably affects smaller landlords more than national chains.
Lastly, there seems to be a brain drain of folks who can work from home not wanting to live in expensive cities where they are trapped in their 400 sq. ft. apartments. Thus the demand to real estate in the major markets has probably waned, affecting these larger funds.
If we compare equities to real estate index funds in 2020 we see that stocks have greatly out performed real estate after the big crash in April. Who knows if that trend will continue or what will happen in 2021!
Why did Stocks go up in 2020?
Given all the data I’ve just shared with you, you may be wondering why the markets went up in 2020? After all, we had so many lifechanging negative events! Let’s take a look at some of my hypothesis:
Many companies were forced to be flexible and were pushed online to adapt or pushed out of business. Personally, we had tried doing grocery pickup before, but for me it never really caught on. I have some bad experiences as retailers hadn’t perfected it, and I still felt it necessary to go in the store.
Fast forward to 2020 and the need for contactless delivery due to the pandemic. I no longer have any real desire to spend 2-3 hours shopping, waiting in line, running kids into dirty store bathrooms, busting out my calculator to calculate whether buying in bulk/generic is more important, etc!
Grocery pickup is amazing! I save probably 3 hours per week that I can now spend with my family, or writing for you all! Also, we have adopted Amazon prime as well, no more running to the store when we need something, I just click a few times on my phone, and it arrives! Any issues, I click return and someone picks it up. From a consumer point of view, this is amazing!
This also allows business to cut overhead, or adapt positions. No longer the days when I was a kid trying to see which of the 14 open registers has the shortest line. Also trying to judge who is going to be the fastest based on what everyone has in their cart! Now I sit in my parking space, and usually in 5 minutes or less I have all my groceries in my trunk!
If you want to get crazy, you can even pay a few extra bucks and someone will leave it on your doorstep!
Given the innovation in our lives, there is also light at the end of the tunnel for some of the crisis that we have been through. Two vaccines are being implemented as we speak, and the presidential transfer of power will peacefully take place later this month.
The expectations for 2021 from the investors that the new normal will increase the amount of innovation and technology adaption. For example, who needs to fly everywhere to have meetings? Just use a Zoom call, save the company money, and time for executives to innovate and increase productivity.
Stock Performance in 2020 Recap
Overall despite the craziness, if you held on and continued to invest, you made out well! A 15%-20% return on your money by doing nothing at all is always a welcomed sign. The market is complex and convoluted, we cannot try to understand or predict it! That is why Joe Six Packs around the country would benefit from investing in stocks for the future! Who knows what 2021 will bring, whatever it may be here at Joe Six Pack Finance we will be ready!