2020 was unlike any other year in recent memory. Not only were lives lost and families devastated by COVID-19, but the economy was also thrown into turmoil. It was a strange kind of turmoil, too — a tailspin that experienced a surprising lift by the second half of the year and left some people better off than before.
Now, as we head into what economists are calling a K-shaped recovery, it’s time to take a closer look at how people invested in 2020. Which investments prospered, and which floundered? How did people — young and old, wealthy and not-so-wealthy — allocate their assets? Here are some key takeaways from 2020, with a quick look at which trends might continue in 2021.
Stock Market Fluctuations
U.S. stock markets experienced a steep drop in the first quarter of 2020, as news of the COVID-19 pandemic spread. Stocks fell at least 20% in February and March as investors panicked and sold their shares. The market ended the year on a relatively high note, but the increase was largely driven by tech stocks. For anyone holding stocks that didn’t fit into this category, the market was flat.
More than half of American families have at least some involvement in the stock market, according to the Pew Research Center. The level of involvement varies hugely, depending on age, income, and background. But thanks to pensions and 401(k) plans, an estimated 52% of Americans have a stake in the rise and fall of the market and are impacted by its ups and downs.
Broadly speaking, the financial impact of 2020 varied greatly from one family to another, tracking with income level. Well-off Americans came out with more savings and wealth than they had at the start of the year. People at the upper end of the economy also held on to their jobs, since they were largely able to keep working from home.
At the other end of the economic ladder, the poorest Americans experienced job losses and severe financial hardship. Around one in three Americans dipped into their savings and retirement accounts to make ends meet, further widening the income gap.
How Different Age Groups Invest
Young Americans are more heavily invested in the stock market than older people are, according to a report by Vanguard. In fact, the typical investment portfolio of a young person — defined as being younger than 40 — contained 90% stocks.
As a result, younger investors experienced the biggest hit when the stock market tanked in early 2020. By the same token, investors who held on to their stocks also had the biggest gain when the stock market lifted in the second half of the year.
Older investors, on the other hand, are relatively insulated from the market’s ups and downs because they have greater investment diversification. In general, diversifying investments, instead of relying too heavily on high-risk stocks, is a commonly followed way to protect yourself from a volatile market.
Older investors tend to be more risk-averse, which means they usually favor bonds and predictable, less variable investment instruments.
A Look at How the Rich Invest
“The rich are different from us,” F. Scott Fitzgerald once famously said. According to legend, his pal, Ernest Hemingway, gave Fitzgerald a wry smile and said, “Yes, they have more money.”
Sometimes millionaires seem to operate according to their own rules, inaccessible to the rest of society. In reality, as Hemingway knew, the rich are not qualitatively different from everyone else. It’s easy to be dazzled by high-roller investors, but it may be wiser to study their investment practices for what you can learn from them.
In 2020, millionaires held diversified portfolios, putting their money into bonds as well as stocks. High net worth investors put 40% of their resources into the most stable investments — a mixture of cash and fixed income assets, like bonds — and kept them there in 2020. As it turned out, the bonds outperformed stocks by the last quarter of 2020.
What Did People Invest in Last Year?
Of course, investors put plenty of money into stocks and bonds in 2020 — if they hadn’t, the market would’ve looked very, very different by the end of the year. But a lot of investors also stepped off the beaten path and put their money into new endeavors.
The Year of the ESG
2020 saw a major increase in responsible investing. Environmental, social, and governance (ESG) investment grew by leaps and bounds, driven in large part by increased investment by millennials.
A report by Fidelity found that stocks with high ESG ratings had consistently better returns in virtually every month of 2020. Deloitte predicts that this trend will continue, or even increase, so that ESG-mandated assets could eventually make up 50% or more of all the managed assets in the United States.
In a survey by the PR firm Edelman, a strong majority of respondents said they believed businesses should be concerned with the well-being of their employees and take an active role to fix societal problems, even stepping in when the government doesn’t take action.
Cryptocurrency soared in 2020, reaching its highest level in years. In December 2020, Bitcoin — the oldest and best-known form of crypto — was trading at over $20,000.
Analysts attributed this to the fact that crypto is becoming more popular with new segments of investors. Once largely the province of tech professionals, Bitcoin is slowly moving into the mainstream. The currency may also be benefiting from its self-imposed scarcity and from a growing perception (which may or may not be accurate) that it can be treated like a tech form of gold.
The phrase “alternative investments” is an umbrella term used to describe any form of investment that doesn’t fit into the standard categories of stocks, bonds, and cash. If you’re investing in gold bars, vintage wine, or works of art (or if you’re going the non-fungible token route), you’re making an alternative investment.
Analysts have been talking about the rise of alternative assets for some time now, and 2020 was supposed to finally be their year. After all, alternative assets are more agile and easier to customize than most asset classes, which makes them a likely choice for millennials who believe in putting their money where their hearts are.
As it happens, the alternative asset class took a very slight dip in growth in 2020, probably due to the year’s turbulence. However, analysts say they still expect the asset class to grow significantly more popular among investors, outpacing other classes, over the next several years.
There’s a clear through line to all the 2020 investment trends. Savvy investors are looking for reliability in a volatile world, which is why bonds were such a big deal. But investors are also looking for something they can believe in. The huge growth in ESG assets proves that today’s investors are thinking with their hearts as well as with their heads. In order to succeed, therefore, an investment instrument will ideally be both reliable and worthwhile.
Investors may want to keep their eyes open for new investments that combine intelligent money management with value-driven thinking.
SMBX’s Small Business Bonds™, for example, allow ordinary people to put money into the businesses they value, sometimes right in their own neighborhoods. That kind of carefully considered, hands-on local investment can create cycles of wealth in communities.
Any way you slice it, 2020 was a wild ride — but hopefully, investors can take the year’s lessons onboard as we move ahead into calmer waters.