Investing

2020 stock market review (and how it can help your portfolio in 2021)

2020 stock market review (and how it can help your portfolio in 2021)

2020 will go down in history as one of the most memorable years, not just because it’s a milestone year, but because of the significant events that happened like COVID, Black Lives Matter, and of course, the US Presidential Election (and all the entertainment it provided). 

From a market perspective, 2020 was a volatile year but ended positively for investors.  Let’s take a look at some of the detailed data from the world of markets and investments to see how everything fared for the year.

Bonds weren’t boring

In 2019, bonds gave investors a pretty healthy 6.9% return which was a big jump up from the previous year’s return (2018) of 1.4%.  Amazingly, Bonds did even better in 2020 with an 8.69% return.  Who would have guessed that bonds would have given solid returns for investors seeking more safety?  Here’s some more details for 2020 fixed income investments:

  • Inflation = 0.95%
  • Treasury Bills = 0.86%
  • Short term Bonds = 5.29%
  • Bond Universe = 8.69%

At the beginning of 2019, few experts predicted a rally in the bond market and very few would have guessed a return of over 8% in 2020. Given the low interest environment and the widely accepted outlook that you can’t make a lot of money with bonds, it was a pleasant surprise to see this asset class give a nice return to conservative investors. The last time we saw a price increase in bond returns was 2014 when bonds returned 8.8%. I can’t imagine 2021 repeating the returns that we got in 2019 and 2020 but who knows?  

Volatility in Canada

The word we would use to describe the Canadian Market in 2020 is “Volatile”.  You could probably use that word to describe the stock market in any given year but 2020 was special because of the impact of COVID (or more the perceived impact of COVID).

The TSX started the year just like any other year but in March, when Canada and other parts of the world started to impose restrictions, the markets reacted and we saw a 17.38% decrease in the single month.  That’s huge!  But then we saw a 10.79% increase in the following month (April).  It was quite a roller-coaster!

In the end, Canada finished the year with a growth of 5.6% largely due to a really strong market jump in the month of November.  Volatility is normal in markets but there were some pretty wild swings in 2020.

  2020 2019 2018 2017 2016 2015
S&P/TSX Composite 5.60% 22.88% -8.89% 9.10% 21.08%

-8.32%

US and the headlines

Obviously, the headlines in 2020 were all about Trump and the US elections but the US market also hit big news.  Similar to Canada, the US markets were also volatile, but the S&P finished the year with an incredible 20.89% gain.  That 2 years back-to-back returns over 20%.  Canadian investors only experienced 18.77% growth because the Canadian dollar strengthened in 2020 to the US dollar.

  2020 2019 2018 2017 2016

2015

S&P500 (in Cdn$)

18.77% 24.84% 4.23% 13.83% 8.09% 21.59%
S&P500 20.89% 31.49% -4.38% 21.83% 11.96%

1.38%

 

International News

If we look outside of North America, the MSCI EAFE index posted a 6.56% return for 2020.  It was 16.45% when converted to Canadian dollars.   In fact, according to MSCI data, every market in the world finished 2019 with a positive return.

The Top 5 markets in the world were:

      1. Denmark
      2. Netherlands
      3. New Zealand
      4. Finland
      5. Israel

Bottom 3 markets were:

      1. Belgium
      2. United Kingdom
      3. Spain

Market Predictions

So this time of year, we will find lots of predictions, forecasts, and guesses about what’s in store for 2021. Does any of this past information help us with managing our portfolios moving forward? My simple answer is probably not. Having been in the financial industry for almost 30 years, I have participated in a lot of market forecasts and inevitably, I have been wrong just as often as I am right right (maybe more wrong than right actually). But what I can also tell you is that I am always eventually right . . .  it’s just hard to get the time frame correct.

When it comes to managing my own portfolio, I employ a “Keep it simple” strategy. I try to avoid predictions and forecasts. All I do from time to time is re-balance my portfolio of ETFs. Given what happened to markets in 2020, re-balancing will likely lead me to sell some of the profits I got in Canada and the US and buy some extra cash/fixed income and maybe some international exposure.

Related article: My portfolio of ETFs

Related article: The power of re-balancing a portfolio

Bench-Marking performance for 2020

One of the reasons to look at the returns of the markets for the past year is not necessarily to help look into the future but rather to give you an idea if your portfolio is producing a reasonable return compared to benchmarks. For bench-marking purposes, these returns might help serve as reasonable benchmarks for 2020:

      • Conservative portfolio return = 7% to 9%
      • Balanced portfolio return = 8% to 10%
      • Growth portfolio return = 10% or more

Here’s some benchmarks for longer time frames:

  3 year 5 year 10 year
Conservative Portfolio (30/70) 6.1 5.5 5.8
Balanced portfolio (60/40) 7.4 7.4 7.9
Growth Portfolio (85/15) 8.1 8.7 9.3

 

Here’s some of my personal returns for your interest

  • My RRSP portfolio of ETFs at Questrade returned 6.8% in 2020 and has a 5-year return of 6.9%. I’ve kept my RRSP portfolio more conservative and help some extra cash from profit taking in past years.
  • My TFSA portfolio of ETFs at Questrade is a much more growth-oriented and as a result, it posted a return of 27.0% and has a 5-year return of 20.8%.  My TFSA is 100% equities and the place where I want tax free growth.
  • Liz’s RRSP portfolio is in a balanced mutual fund in a Group RRSP at Manulife. It finished the year with a return of 8.1% and a 5-year return of 6.3% net of fees.
  • Our RESP portfolio with JustWealth is also more conservative as the kids are getting close to post-secondary education. As a result, the 1-year return was a little lower at 6.1% (I don’t have a 5-year return because the money has not been there that long)

Overall, I am satisfied that the returns of our portfolios are reasonable given returns of the markets in 2020.

How did you do it in 2020?

Comments

  1. Matt

    I agree with your approach of not trying to make sense of it all and just stick to the plan. Index investing within Canada, USA and overseas in equity markets will spread out the risk.

    However, for bonds, I just can’t get myself to take interest with the barely inflation returns on them.

    • Jim Yih

      Thanks Matt, I don’t think many people are excited about bonds. I view them as something needed for diversification and defense these days.

  2. Claude Mayrand

    Jim,

    None of us retirees are stock traders. We don’t have the skills, temperament and software to buy low and sell high to generate cash for a comfortable retirement.

    As to bonds, they’re a lost cause: a very poor return and a very poor taxation treatment.

    2016 was an extremely difficult year at its beginning. January and February were down months for all. The down trend was worse because most Day-Traders were also out of the market.

    I trade funds on the TSX, only; I’m just not smart enough to deal with currency issues and political shenanigans in other countries. The funds are managed by professionals who usually know what they are doing. I measure how well they are doing by the cash they pay me: their consistency and Yield are my initial criteria for choosing a fund; their tax treatment is another criterion and is why I avoid anything that pays me interest.

    In January and February 2016, I had to sell some funds and stocks because my Margin was too high. I was much busier than usual. I spent three times as many hours in those two months as I usually do to monitor and manage my portfolio during January. In March I bought back some of the sold positions and bought better ones.

    By December 31, my monthly income had increased .8% over January 1, and my portfolio value had increased by 26%. So far in 2017, my income is up 2.56% and my portfolio is up 6.13%.

    I used to study individual stocks and their Distribution experience. Now I search for funds (mutual, closed and open-ended) using TMXMONEY and Google Finance screeners.

    The funds are all managed by professionals: their websites are very informative, their Distributions are almost all very tax efficient, and the fund holdings are very diversified or very targeted.

    The focus of my investment strategy is monthly income. Nothing else matters, nothing, because I am one of the 60% of Canadians who don’t have a corporate or taxpayer funded pension.

    The stock market, specifically the TSX, is a barometer or benchmark of what’s happening to my portfolio value. Usually, these fluctuations don’t affect my monthly income from my funds. Remember: the focus of my portfolio is to provide me with monthly cash.

    • Jim Yih

      Thanks for sharing your story. I know a lot of people who feel the same way.

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