The Key Financial Lessons From an Awful Year

2020 has been terrible. But in its awfulness, it may also have revealed the importance of what we take for granted too often. This ranges from the everyday, like getting a haircut or catching a quick lunch, to the profound—the personal connections that enrich life. Being prepared financially is on the mundane end of the spectrum, but in our view, this year has made its value abundantly clear. So in the spirit of learning from hard knocks, here are some financial lessons brought to you by 2020 that we think bring timeless benefits.

It pays to stay cool and level-headed—especially when most aren’t. By their very nature, unprecedented events with big, negative consequences trigger fear and panic. But such crises aren’t the only risk. They can lead you to take the wrong actions at the worst possible moments, compounding disaster. In mid-February, after an exceptionally strong 2019 that looked likely to continue, stocks faced a wallop: a pandemic that led to blanket economic lockdowns attempting to contain it, crushing economic activity suddenly.

The bear market that ensued sent the S&P 500 down -33.8% in five weeks—a record-fast drop and extraordinary in the history of bear markets, which are usually long, grinding affairs.^[i] It would obviously have been great to be able to foresee the bear market coming and take action in February or thereabouts, getting back in at lower levels later. But the next best option? Staying cool. Five months later, markets had erased the damage.

To correctly have taken defensive action, you would have to had made not one, but two calls correctly: 1) Realize weakness was a bear market—before panic selling set in, bottoming on March 23. 2) Buy back in while stocks were materially lower than when you sold, which likely meant while lockdowns persisted, virus cases were rising swiftly, vaccines were distant and society was just beginning to feel economic damage. Selling in fear of further declines? That is a backward-looking choice that fails to acknowledge 2020’s critical lesson that stocks look forward, to some degree ranging from a few months to a couple of years. Looking backwards from the pain of loss could easily risk your missing the (typically swift) bear market recovery.

Bad stuff happens, necessitating a healthy—but not oversized—emergency fund. This year more than most should highlight why maintaining an emergency fund is critical: It protects you against unexpected expenses, market turmoil or loss of income. Hopefully, you never have to tap emergency funds, but when needed, ready access to some cash can prevent a bad situation from becoming worse. If you lose a job or a sudden expenditure happens to hit out of the blue, having the reserves to tide you over can be a lifesaver.

But don’t go overboard, which could raise the risk of not meeting your long-term financial goals. Many may come away thinking 2020 means you should keep a bigger emergency fund than you would normally—just in case, right? From an investment perspective though, an emergency fund’s purpose is to prevent you from selling during down stretches to fund an unanticipated expense.

That said, we are a bit afraid many may overlearn this lesson, carrying much too much cash, given their goals and needs, out of fear. Having a bigger emergency fund than suitable—typically, around six months’ regular cash flow needs—means more of your savings aren’t working toward your objectives, especially in the near-zero rate era. Socking away large amounts of cash generally reduces your investments’ overall expected return, potentially jeopardizing your financial future. A bigger buffer than warranted doesn’t automatically make you safer or better off—it could be the opposite—which we think is worth keeping in mind.

Don’t wait to plan your legacy. There have been too many untimely deaths this year. Unfortunately, many left their financial affairs in disarray—and grieving loved ones struggling to get them in order. Contemplating your own death may be difficult emotionally, but it can lighten the burden on your loved ones when they may need it most.

If you haven’t already, start by establishing a will that clarifies how you want your estate divided. At the same time, review beneficiaries on your retirement accounts to ensure they are up-to-date and in keeping with your wishes.

The next step may be harder: informing those you want to help handle your affairs and be your will’s executor. This can be a hard topic to broach, but your heirs and executor will appreciate your briefing them on where you have accounts, who your contacts are and what passwords are relevant, if any. Maybe write a letter and tell them you will leave it in a safe place. Of course, there are other things to consider: any end-of-life directives, medical or financial power of attorney and your digital assets (online accounts, profiles and the like). But getting the basics down is the best way to begin.

Weigh what matters. As 2020 has demonstrated in spades, life is short and unexpected things happen. We may not know what the future will bring, but it helps to envision what you want yours to look like—your lifetime goals—to map out how to achieve them. With vaccines potentially heralding a return to more normal activity in 2021, this is a good time to think critically about your long-term objectives and whether they have changed.

What you need or want your money to accomplish—the overall purpose for the nest egg you have built—may be different than what you imagined before. Is there a charitable organization you have become involved with that you would like to leave a legacy to? A child or grandchild whose education you want to fund? A second home you have been considering? Or, do you intend to live it up and do everything you always wished, but couldn’t during your working years? What if there is a terminal diagnosis for you or a family member that accelerates your plans? Are you planning properly for long-term care expenses late in life? Reappraising your financial plans in light of changes to your investment goals could inform how you construct your portfolio to bring them to fruition.

To make the most of a bad year, learn from the challenges it revealed and come away stronger from it. Adapting in this way can turn a dark year into a brighter future for you—and your family—financially.