What if I told you next year there would be a World War, a worldwide famine, or the collapse of the financial system? Or all three at the same time?
I was fascinated by how quickly people made predictions in March, and then a few months later, most people were willing to admit, “I have no idea what is going to happen.” Then, they went on living their lives. I cannot recall a similar experience in my lifetime.
Normally, people make predictions about trade wars, politics, federal debt levels, investments, where the stock market is headed, interest rates, and more. Although truly awful things happened this year, the absence of predictions was peaceful.
I imagine we are going to see bold predictions in the coming months. Some will be extremely positive. Some will be extremely negative. Most will fall somewhere in the middle, and most will be wrong.
As humans, we want to tell ourselves stories to make sense of the world – and that includes predictions. You would think after a year like 2020, we would understand accurate predictions are impossible to make consistently, but I am confident (note the irony of my prediction), people will make predictions again. They make us feel better. They make sense of the world. They help us deal with uncertainty by assigning some certainty, even if deep down we know it is impossible to make accurate predictions.
If I had to sum up this year with one sentence about how I am feeling, it is: I am humbled by this year.
World economies shut down. Entire countries worked together to combat a pandemic. Some shrugged it off and continue to face the consequences of that decision. There were worldwide Black Lives Matter protests. Front line workers continue doing their jobs through incredibly difficult times. Medical workers continue sharing their experiences. Congress passed the CARES Act, which provided over $2 trillion in aid – more than double the 2009 stimulus package. There were notable deaths, including Supreme Court Justice Ruth Bader Ginsburg, Chadwick Boseman, John Lewis, Alex Trebek, Kobe Bryant, and many more. Meghan and Harry left the royal family. The United Kingdom left the European Union. The United States had one of the oddest elections.
I am writing this in early December. Who knows what will happen in the final weeks of this year?
With the year coming to a close, I want to reflect on 2020. It won’t all be money-related, but I will weave in personal finance lessons from this year. It goes without saying, but a lot happened in 2020. This is by no means comprehensive, and I am leaving out a good portion.
My Reflections of 2020: Thankful
Despite everything this year, I have an immense amount to be thankful for. I start here because showing gratitude is vital to happiness.
My parents are still alive, both of whom are in very high-risk categories if they were to catch COVID. My family and friends are healthy. Molly and I are healthy and recovering after getting COVID. Our risk exposure is higher because Molly works in healthcare. Despite being very cautious, masking, and following other guidelines, we still caught it. Thankfully our cautiousness likely means we did not spread it to anybody else.
I am still employed. I still have health insurance. I had an office set up at home when the pandemic started. I had moved out of my 525 square foot apartment about 8 months before the pandemic started. I cannot imagine what life would have been like working and living in that space.
Video calling exists, which has allowed me to check in with my parents once or twice a week since I choose not to see them regularly because of our COVID risk exposure.
I don’t have kids or someone else dependent on me. I have no idea how parents or caregivers are managing. They are amazing.
There is a roof over my head and food in the fridge.
Despite life changing, I am thankful.
What are you thankful for this year?
Pointless Trying to Predict Things
If you knew there would be a worldwide pandemic this year, what would you have done to plan?
Having lived through it, you know now, but I doubt your answer before the pandemic would match your answer now.
Nobody guessed there would be a pandemic this year. Nobody guessed the Federal Reserve would cut rates to zero. Nobody guessed we would see massive unemployment. Nobody guessed jobs would be added back at a fairly quick rate. Nobody guessed we would see a $2 trillion stimulus package.
Nobody guessed any of it.
Even if you knew a pandemic would happen, there is no way you would have known exactly how the rest of the world would respond. There are too many forces that act upon other forces. There are too many variables to say if X happens, Y happens. We want it to be that way, but it’s not.
Look at the chart below of the unemployment rate. We have never seen a spike like that before. We also have never seen the unemployment rate fall as quickly. We can use history as a guide to making informed decisions, but the possibilities are always endless.
Look at the chart below of the total public debt. Again, a huge spike. Who would have guessed $2 trillion would be pumped into the economy with possibly more stimulus on the way?
Look at the chart below of the US National Home Price Index. As we saw massive unemployment and a recession, home prices went up significantly. We can look back and say, “Well, people want to spend more time at home, so it makes sense home prices went up a lot. Plus, mortgage rates are much lower.” This was not apparent at the start of the pandemic. Home prices may still go down. Nobody knows. Mortgage payments past due have spiked recently.
Another interesting and terrible aspect of the pandemic is how it has affected people of different incomes and wealth. Those who were doing well financially are likely still doing well. Those who were not doing well financially are likely in a far worse position.
Although recessions never impact people the same, this recession seems to have created more of a disparity. We will see how evictions and mortgage defaults impact the economy in the coming year, as well as whether wealth and income inequality continues to rise.
Even if someone had a perfect crystal ball and knew precisely what was going to happen, they would have no idea how everyone else would respond. We all view the world differently and act accordingly.
After all, who would have thought during a pandemic, where many businesses shut down for over a month that the stock market would be up this year?
Cash on Hand Helps
With the market up significantly since March, people may have already forgotten the importance of cash. As markets rise, investors tend to feel like they are missing out on returns and forget the purpose that bonds and cash fill in a portfolio.
I think back to March and April and how thankful I was to have cash in the bank. I was worried during that time. Markets dropped 30%-35% in the span of three weeks – the quickest decline on record.
Cash helped my worries. Although many people recommend 3-6 months, I keep at least 12 months worth of living expenses in cash. Is it too much? Not for me. For others, yes.
The amount of cash you should keep on hand is personal. If you work in a volatile industry where a recession significantly impacts your income, more cash is usually better. If you work in a stable industry with better job security, you likely can get by with less cash.
Besides the need for cash, there is also the emotional stability it provides. I sleep better knowing I can go the next year without an income. It means I can be extremely aggressive with my other investments and have flexibility with most aspects of life. I cannot put a return or price tag on it.
For many others, March was a good reminder of why you should have emergency savings in the amount of 3-12 months’ worth of living expenses. Although I have not seen any studies, I am confident people who had 3-12 months’ worth of living expenses in cash probably were less stressed.
I realize that not everybody has the ability to save 3-12 months’ worth of living expenses. As I discussed earlier, income inequality is a huge issue. I am speaking to those who can save it, but choose not to.
Interest Rates
I still cannot believe where interest rates are today. Below is the 10-year treasury yield. It is an extremely tough environment for people nearing or in retirement because a good portion of their portfolio likely will have low returns. Though inflation is low, the forward-looking return expectations on bonds are very low.
I am also amazed by mortgages rates. The 30-year fixed mortgage rate is below.
For people buying homes, low-interest rates are helping. It likely is also pushing up home prices, as lower rates mean people can afford more expensive homes.
When I started looking for my home, I thought I was getting a bargain at 3.75% for a 30-year fixed loan. I thought I would never find a lower rate.
I was very wrong. I refinanced into a 3.05% rate loan. Once again, I was amazed a bank would lend me money for 30 years at 3.05%. I thought I would never find a lower rate.
And, here I am today, refinancing once again. Somehow, I was able to find a 30-year fixed loan at 2.375%. Most loans I am seeing today are 2.5% – 3%, but for some reason, I found a lender that finds my mortgage attractive.
I have not finished refinancing, but once again, I am thinking I will never find a lower rate. I hope I am right. I refinanced twice in less than two years.
As I mentioned earlier, predictions are impossible to consistently and accurately get right. After my refinance, the difference between my original payment when I purchased and today will be more than a few hundred dollars. I benefited greatly from lower rates.
I am very curious about how interest rates will play out over the next 10 years and what it means for housing prices. I think about how if interest rates were two percentage points higher, how many people will be capable of buying homes at today’s prices?
My gut says not many.
I find it difficult to believe wage growth will increase fast enough. But, like other predictions, I am probably wrong. Then again, the United States does not build homes fast enough to keep up with demand.
It will be interesting to watch.
Work from Home
Everybody will work from home for forever! At least that is what many people are saying.
It’s been interesting to watch some companies who were strongly against working from home adapt to working from home.
Personally, it’s been nice. I started running and going for walks more. But, I also miss the office. I think we will see more remote work in the future combined with working from the office. I am not one of those people who believe everything will be remote. I think it’s possible to build a great team and company remotely, but it takes a certain level of commitment.
I am also still skeptical of remote work creating those natural moments you get in the office as you are making tea, riding the elevator, or leaving the office at the same time. I never realized how critical those moments were for building relationships, even if they are small.
There is something about being in person, talking, and coming up with new ideas with a colleague. Based on what I am hearing, it feels like that is happening less.
I also think we are social creatures. People will crave social interactions at some point.
While I do not have kids, I also imagine there are many parents who would not mind being back in the office where their colleagues are the only distraction.
Although many companies are giving up commercial office space, I wonder how much of it will come back. I see the case for a smaller footprint long-term if more people are working from home, but I also am curious about how commercial office space will get repurposed.
Time will tell what happens with working from home.
Next Year
Let the predictions commence.
When will most people receive the vaccine? When will the virus spread stop? Will the virus mutate? How effective will the vaccine be on a mutated virus? When will we stop wearing masks? What will happen to the stock market? How many people will be evicted? How many mortgage defaults will there be?
When will people start traveling regularly again? What will happen to plane ticket prices? Where will people stay if hotels go bankrupt?
I do not know the answer to any of those questions. I have my guesses, but they are just that – guesses. It is my way of making sense of the world.
Despite all the awful things that happened this year, I do know I am thankful for this year. There were good parts. This blog is one of them. I have been writing for about six months and though the audience is small, my Chief Editing Officer, Molly, (she wanted a fancy title and there is no better title than CEO) is starting to learn more about personal finance.
We were discussing something the other day, and she said, “Oh, I know. That is what you wrote about.” My eyes lit up with happiness. I’m reaching at least a few people.
My goal next year is to grow this blog to 500 visitors a month. I’m around 40 right now. If you benefited from one of my posts this year, please do me a favor and send it to a friend who might be interested in the same topic. I would greatly appreciate it.
As we wrap up this year, take a few moments to reflect. What are you taking away from this year? How has everything impacted you? For what are you thankful?
I do not know what next year holds – it could be better or worse than this year – but, as Morgan Housel discusses, I am a reasonable optimist for the future.