Investing Lessons From The Covid-19 Pandemic

The recent four-year anniversary of the World Health Organization’s Covid-19 pandemic declaration stirred up some dormant anxiety. The lockdowns, mask mandates, and work-from-home orders feel simultaneously distant and like they were yesterday. So much has happened since then.

It was inspiring to see the dedication, patience, and perseverance schoolteachers had for educating kids while physically prohibited from being in the same location. That revelation sparked curiosity about other possible lessons to be learned from Covid. Despite reluctance to delve into such a traumatic period, it’s critical to process and move forward.

The WHO declared Covid-19 a pandemic on March 11, 2020. The very next day, the S&P 500 fell by 9.5%, making it the sixth worst trading day in the index's history on a percentage basis.

How did some specific companies fare? Not great. To give context, below are just a few stocks that were down on March 12, 2020.

● Google down 10%

● Microsoft down 12%

● JP Morgan down 18%

● Berkshire Hathaway down 11%

● Apple down 12%

● Walmart down 8%

● Johnson & Johnson down 7%

● Exxon and Chevron down 10% each

It was a terrible financial day, and virtually no corner of the market was safe. People had a natural human instinct to sell their holdings and move everything safely to cash. Then, the following day, the market rebounded 9.3%, the 10th largest percentage gain in the history of the S&P 500 and a near-full recovery.

Fast-forward three days to March 16, and the S&P 500 dropped 12%—the third-largest percentage drop in its history. Once again, people were panicking and wanted to get out of the market. About a week later, on March 23, the market bottomed out, and the S&P 500 rose about 9.4% the day after.

It was a tumultuous time. Most investors remember the doom and gloom of March 2020—negative headlines about lockdowns, sickness and death, and falling markets. But what seems to get lost is how many upswings there were. Looking back at the data reveals one of the key takeaways. Nervous and impatient investors likely missed the giant recoveries because they tried to jump in and out of the market. More often than not, they were mistaken.

This brings to light another important lesson: Time in the market is typically more productive than timing the market.

Write that down and remember it. Market recoveries can come fast and furious, and missing a handful of them might put giant dents in your overall returns. Need proof? Here are examples of investors staying invested vs. missing out on a few of the best daily market upswings.

Missing Out On The Best Days In The Stock Market

Reviewing numbers from Jan. 1, 1995, through Nov. 30, 2023, provides almost 29 years of data. Think about some of the tumultuous times the stock market witnessed during this period: the Dot-Com Bubble, the Great Recession, and the Covid-19 pandemic.

Fully Invested

A person who stayed fully invested, as measured by the S&P 500, would have seen a compound annual growth rate of 8.3% during this period. This rate of return typically allows money to double about every 8½ years, based on an investment in the S&P 500.

Missing The Best 5 Days

If a person had attempted to time the market by removing money and then reinvesting and happened to accidentally miss the best five days of those 29 years, the impact would have been devastating. The return rate drops to 6.6%, which means a 20% lower annual return than the person who stayed invested.

Missing Out On More Days Gets Worse

If that puts a knot in your stomach, don’t worry; it gets worse. The person who missed the best 10 market days saw the return rate fall to 5.4%, roughly a 35% lower annual return. Omitting the best 30 days drops the return rate to 1.8%, 78% lower than what they would’ve enjoyed if they had stayed fully invested.

It’s virtually impossible for anyone to forecast the future, and that’s the point. It’s simply too difficult to precisely predict the stock market's peaks and valleys. But history provides enough insight and perspective to conclude that, in general, the smart move is to stay invested with a diversified allocation, even when tempestuous times trigger the instinct to flee. As we saw with the wild swings in the stock market in March 2020—some of the worst days in the market are followed by some of the best days in the market.

Other Scary News Stories Since Covid

We’ve seen no shortage of scary developments in the four years since the pandemic.

● Gas Prices Hit An All-Time High

● Russia Invades Ukraine

● Inflation At A Four-Decade High

● Fed Raises Interest Rate To Highest Level In 15 Years

● Israel/Hamas War

● Market Enters Bear Market Territory

Alarming news tends to blind us to the reality of fundamental and historical trends, but using the lessons learned from Covid can help folks resist the urge to bail. Unlike Double Dutch jump rope, there’s a lot of risk associated with jumping in and out of the market.

Let’s use another example. In the summer of 2022, year-over-year inflation rose to 9.1%, a four-decade high. Undoubtedly, that frightened some investors. What has happened since?

• The Dow Jones is up more than 30%
• The S&P 500 is up about 40%
• The Nasdaq is up more than 45%

The happiest retirees are typically long-term investors. They don’t let shocking developments change their fundamental plan. They don’t invest in terms of days, weeks, or even one or two years. Indeed, they stay aware and make adjustments when necessary, but their outlook and investing horizon spans from five to 10 years to multiple decades.

Covid-19 and more recent global challenges are reminders of how essential time and diversification are in helping happy retirees work towards their investing goals.

Staying Invested Over Time

The chart above covers the last 70-plus years (1950-2023) and shows total annual returns for holding all stocks, all bonds, and a 60/40 portfolio of stocks and bonds over the course of one year, five years rolling, 10 years rolling, and 20 years rolling.

As the durations grow from left to right, the range becomes more compressed toward positive returns. Overall, the rate of returns narrows toward the positive over time, providing context to help folks sleep well at night even when their money is invested during volatile downswings.

Bottom Line

The Covid-19 pandemic brought unprecedented changes to the world in early 2020, with numerous events indicating the seriousness of the situation. From the postponement of the Olympic games to the shutdown of the NBA and Disneyland to international travel bans, lockdowns, and global stock market crashes, there were plenty of reasons to panic.

Undoubtedly, Covid-19 signaled the beginning of a challenging period of uncertainty. However, it also provided an opportunity for governments, businesses, and individuals to practice disciplined resilience. Sometimes life is scary, but during those times, it’s perhaps more important than ever to lean on the tried-and-true fundamentals to weather the storm. Applying these lessons to investing shows that when happy retirees trust the historical data and give their investments time to grow, the chances of favorable results typically increase.