Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. One year ago, as the pandemic began to cause serious disruption here in the United States, stocks began an epic, albeit short-lived, slide. Joining me today to talk about some key lessons learned during that period is Christine Benz. Christine is Morningstar's director of personal finance.

Hi, Christine. Thank you for being here.

Christine Benz: Hi, Susan. Great to be here.

Dziubinski: The first quarter of 2020 and the beginning of that second quarter of 2020 was a very unsettling period for investors, for people in general. Stocks were sliding. We were concerned about our health, and we were concerned about the health of the economy. If you had to pick sort of one lesson from that time frame, what would you say it is?

Benz: That panicking is rarely rewarded. We saw during that period that investors who were sellers would have missed out at least on the early days of the recovery. The market recovered very, very swiftly. This is something that we know. We know from lots of other incidents like this, although there wasn't ever one quite like this before, you know that you rarely want to be a panic seller. And think about where 2020 ended up. It's certainly not what I would have guessed if you had asked me in March 2020. We had the S&P 500 gaining 18 per cent; the Bloomberg Barclays Aggregate gained about 8 per cent. So, it was a great year for investors who sat tight. So, I would say the key lesson is that it rarely makes sense to panic in such situations. On the other hand, I would also warn investors that recoveries are usually not that swift. The typical length of a bear market is closer to two years, not just a few months. So, bear that in mind as well. When you think about and brace yourself for future periods like this, know that you don't want to be a seller in these periods, but also know that you may find your patience taxed a little bit longer than was the case during 2020.

Dziubinski: You've talked before that another lesson or a mistake that maybe investors might have made during this period last year was that they were waiting for some signal from the economy to then go back into the market and invest. And that was a mistake, right?

Benz: This is often an issue for investors. They look for the signal. They want to wait until they see a clear green signal that it's OK to get back in there and invest. And think back to early April 2020 when the market did begin to recover, things were still feeling pretty dire. We were all still very worried about the pandemic. We were legitimately thinking about whether it could cause some sort of a depression in the US economy. The vaccine wasn't at all on the horizon at that point, and many very smart people were saying that it could be years before we had a vaccine. If you wait for the all-clear signal to come through, you've oftentimes missed a big part of the recovery. And so, I think the lesson for investors is that they need to understand that the market is often pre-emptive, the market is looking forward beyond current events. And so they want to be careful not to tether how they position their portfolios too closely to whatever is going on in the macroeconomy. The market is usually a couple of steps ahead.

Dziubinski: Let's talk a little bit specifically about equities and lessons that can be learned from equities during that period.

Benz: One thing that I come back to is the fact that we had the value-growth bifurcation coming into 2020 where value stocks had dramatically underperformed growth. I think some investors might have thought, "Well, in some kind of correction we'll see value stocks outperform because they are cheaper after all, right?" And that didn't happen. We saw the high-growth companies, the technology companies that had been pacing the market actually held up better than value, largely because value companies are oftentimes the more cyclical companies. You've got energy and industrials, basic-materials stocks there, and they tend to be very responsive to what's going on in the economy.

The market sell-off that we had earlier in 2020 had to do with concerns about the health of the economy. The low-valuation stocks are not a cinch to outperform during market corrections, during periods of market turbulence. At times they will be, so think back to the early 2000s. We very much did see a rotation out of some of the high-growth technology companies. It didn't happen this time around. So, value stocks aren't a cinch to outperform. And really, all bear markets like the one we had in 2020 are a little bit different.

Dziubinski: Even though investors who stayed the course in 2020 were rewarded, as you alluded to, given the rebound in the market, you do also say that one lesson from last year was the value of having some liquid reserves on hand. How so?

Benz: Right. It was very much a scramble for cash, and the key thing that I noticed during that period, Susan, was that investors were throwing almost everything overboard in search of cash that even high-quality bonds went down for a period of time. And prior to that period, I would have said, well, usually in some sort of a market inflection point like that you'd see high-quality bonds perform pretty well. Not during that period. Short-term bonds, even the safer stuff went down, at least for a short period of time. So, if you really needed money for some expense during that period, you would not want to be a seller of anything. You would have that cash locked down. So, cash is cash. And I think investors ought to remember that. Yields, of course, are very low today. So, you don't want to overdo cash. But I do think that it was an illustration during that period that there was no substitute for true cash holdings.

Dziubinski: And you mentioned bonds. Given what happened in 2020, what can we learn about how we should be thinking about our fixed-income allocations given those experiences?

Benz: One thing we saw during that period was a real underperformance with what I sometimes call faux diversification. Some of the higher-yielding bond types, whether emerging-markets bonds or US junk bonds, lower-quality corporates, really took a tumble during that period, and that's something that we've known for a while—that directionally performance-wise, they tend to behave more like stocks than bonds. So, to the extent that you hold them in your portfolio, think of them as maybe a lower-risk equity substitute as opposed to a fixed-income substitute. If you need fixed income in your portfolio, if you want to try to pick up a little bit higher yield than you can obtain with cash holdings today, you'd want to stick with high-quality bonds, which generally did hold their ground. Even though they weren't foolproof during that period, they did hold their ground better than the lower-quality stuff. So, you want to make sure if you have diversification that it's real diversification.

Dziubinski: Well, Christine, thank you so much for your time and for your reflections on the 2020 bear market. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I'm Susan Dziubinski for Morningstar. Thanks for tuning in.