No, COVID-19 has not busted the fundamental rules of investing

And neither has GameStop. A look back at 2020 tells everything you need to know

The latest newsletter from the passive investing gurus at Rebalance contains the striking (gulp!) chart above depicting the stock market’s gyrations last year. Readers will remember Rebalance founder Mitch Tuchman from this 2019 podcast.

This chart caught my eye partly because of the GameStop frenzy. The financial press has gone crazy for this story, and it does have some irresistible elements. It’s a bit like someone sitting on their bed that weighs 400 pounds hacking the market, to coin a phrase.

But GameStop really strikes me as the dumbest business/financial markets story of the year, for two key reasons:

1. The internet manipulators are just joining a game Wall Street has played for years. Now the street is “shocked, shocked to find that gambling is going on in here,” as per Captain Renault.

2. GameStop doesn’t matter for the average American investor.

Most retirement investors have their money in big mutual funds, very often index or total market ETFs that buy the entire market. Manipulation of a single stock like GameStop - or even a few stocks - is irrelevant. Yes, GameStop shook up stocks, and there are reasons to worry about possible failures of brokers or hedge funds - but the market is showing broad resilience, as Wall Street Journal columnist James Mackintosh notes this week.

Christine Benz at Morningstar puts it this way:

Christine Benz @christine_benz

Much of the $GME narrative is around the idea of the little guy "sticking it to the man." But please let's not forget that the late Jack Bogle created an entire SYSTEM for doing just that. It's called buying (and holding) index funds.

What does matter? Rebalance recaps the fundamental lessons of 2020 in a post that accompanies the chart. I’m excerpting five of the lessons below, condensed for length; you can read the full list of lessons here:

• Prepare for the “black swan event”, not what is in the news. As we entered 2020, investors obsessed about the upcoming election. But could one predict that we were two months away from the emergence of a deadly virus?

• Stock markets dislike uncertainty. Sometimes even negative information is a positive if it increases certainty. The stock market started to recover in late March and April of last year, even as the news got worse, mainly because investors started to understand the magnitude of the issues caused by the pandemic.

• Don’t fight the Fed. One reason stock markets began to become positive is because the Federal Reserve reacted swiftly and powerfully to the developing crisis and quickly applied stimulus.

• Stick with your long-term plan. You may have felt like a fool when the stock market sank rapidly. Human beings have survived life on planet earth by running away from danger and we are “wired” to do so as a result. Surviving and thriving in difficult stock markets often requires investors to override this instinctual behavioral, and to look at danger calmly and as a possible opportunity.

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