Watchword for 2021: Resilience
No one can dispute that 2020 has been a demanding year. While not as trying as world wars or a massive depression, this year has been uniquely difficult. Many of us have suffered losses personally and financially. I doubt there are many people who will miss the passing of this year.
On this eve of a new year, I am adopting “Resilience” as my watchword. In physics, resilience refers to the capability of a strained body to recover its size and shape after deformation caused especially by compressive stress1. I use it in its other sense, an ability to recover from or adjust easily to misfortune or change. If 2020 has shown us anything, it has shown the human race’s ability to overcome adversity.
While reports of COVID-19 cases continuing to climb is disconcerting, the news of multiple vaccines being deployed bring some hope. The equity markets have certainly shown resilience this year. From a low of 18, 591, the Dow has rebounded to climb above 30,000. The reason for this is that the markets tend to be forward looking. They will overreact, sometimes wildly, to current news. For the most part, though, the markets are anticipating future growth, future earnings, and future potential.
There is huge pent-up demand in a number of sectors that have been slammed by the lockdowns. The travel industry, for example, is posed to explode if enough vaccinations are administered. Energy companies may also rebound as a result of increased automobile usage. Elective surgeries, dental practices, and theme parks are just a few of the others that should benefit from increased consumer spending.
There are reasons for some optimism, but there are still difficulties ahead. Nonfarm employment rose by 245,000 in November and unemployment rate declined to 6.7% in November. While encouraging these numbers reflect a slowing trend. If that trend continues it may reflect a permanent loss of jobs in certain industries. That would not be a welcome sign.
We have all read of the impact to small businesses from the pandemic and lockdowns. It remains to be seen whether they can recover from their losses. I have yet to see legislation that provides the needed lifeline.
Another area of concern may be an unexpected rise in inflation. The Congress and the Administration has shown little restraint in spending and no inclination to reducing the debt. In the time of a pandemic, this might be expected. Unfortunately, I am not confident our political leadership will develop that discipline in the future.
Most surveys of industry professionals indicate an uneven recovery. Expectations of market performance are in the single digits.
Where does that leave investors? A first step would be a portfolio review to ensure your allocation aligns with your risk profile. Portfolio construction should be done in the context of your risk tolerance. If your allocation is not adjusted on a regular basis, you may be faced with an imbalance in one or more asset classes, markets, industries, or sectors. This may expose you unduly to unnecessary risk.
Your risk tolerance, your goals, and your time horizon are all important considerations to discuss with your advisor. They can help develop the proper allocation of your portfolio to those considerations.
Too often, investors neglect the importance of reviewing a portfolio to gauge whether it has become wildly imbalanced. This is especially critical when it comes to retirement savings. It also an appropriate time to review your financial plan. If life events have occurred in the past year, it is important to consider the impact to your plan.
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