Broker Check

Winter Update 2020

| January 09, 2020
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2019: Strong markets, unsettling headlines (and very nearly irrelevant)

2019 started strong, coming off a bearish 4th quarter in 2018. The U.S. stock market grew steadily, with only a small pullback in May. U.S. bond markets had a banner 2019. Much of this rise was due to money flowing back to the U.S. from foreign investors and foreign banks. Throughout the year, the markets would react daily to tweets from President Trump and the Federal Reserve's actions/comments. 

For most investors, it was a good year, but the past is irrelevant when trying to answer "what do we do now?" It's not just a disclaimer. It's real. The temptation to chase past returns is one of the most damaging things to investors historically.

The answer to a review of 2019 is "Thanks, 2019! Now on to 2020."

2020: Unknowns continue

In the new year, nothing much has been settled. Headlines about China, impeachment, Iran, and the upcoming election will likely be distractions. Let's take a look at the investment environment we face today.

Stock Markets

It has been nearly 11 years since the stock market hit bottom in March of 2009. Since that time, the stock market has experienced a decade of nearly continuous increases. We are long overdue for something different. But many investors, looking at 1,3,5 & 10-year returns from stock indices are forgetting that past results do not repeat. The desire to add risk and "get more aggressive" is palpable. Our lizard brains are wired to say, "Wow, what great results! I'd like to have that too. Maybe I could do better by buying what just did so well."

The reality is that those returns are over, and the next decade is unknowable. Maybe a true bubble will develop, with a few more years of this awesome party. Or maybe the DJIA drops back down to 19,000 before ultimately moving on to new highs. Or maybe we get a choppy, sideways decade.  The truth is that nobody knows for sure. Nobody. 

Bonds

Bonds are designed to provide income and not grow in value. The only return from bonds over the long run is their interest rate. As of this writing, interest rates are historically low, with 1-year CD's around 1.75% and 30-year A-rated corporate bonds yielding around 4.3%, with 10-year treasuries providing about 1.85%.  Inflation is around 2%, so it's increasingly difficult to generate returns above inflation without committing to very long terms or sacrificing credit quality. 

Controllables

So what can investors do? History shows that buying-and-holding low-cost index funds (or ETFs) tends to fare better than the average active manager. But we know that the stock market is near record levels, and interest received from holding bonds is near record lows. What are the "high-probability" victories that deserve your focus in 2020? 

Get the important questions answered this year. 

Many people either ask the wrong questions, or don't know some questions that should be asked. There are three main questions we recommend that all clients ask. Am I on track to meet all my financial goals with a high probability of success? What can I do to improve? What concepts do I need to understand to help me make better decisions? Under each of these there are more detailed questions, and you can find the entire list in our article from a few years ago. Click HERE for the complete list of those questions. 

Investment Strategy

Your investment strategy needs to accomplish two things: (i) Obviously it needs to help you fund your financial goals with a high probability of success and (ii) the strategy needs to match your tolerance for risk. 

The problem is that we humans react to stuff and make erroneous decisions. We buy high. We sell low. We chase returns. We do things to impress each other. So the answer comes down to keeping your investments at a comfortable risk level. This way, you are more likely to stick with your strategy for a long time. As always, if you feel your risk tolerances have changed, please contact your advisor. 

Fund Your Important Goals First

Today many people try to fund their future goals from the leftover crumbs of their inflated lifestyle expenses. This doesn't work very often. The best thing you can do is fund your financial goals first, and live off the rest. Financial goals may include emergency funds, paying down debt, disability coverage (if working), long-term care coverage, life insurance (if you have a family, you probably need way more than you think), wills/trusts, and also retirement/education funding. 

One great way of thinking about this is to look at your income after taxes (but including your 401k contributions). Use 20% to fund your future goals like retirement. Use 50% for your basic needs (BASIC, not luxury and options). Then use 30% for lifestyle upgrades and optional fun things. 

If you are retired, simply live within your means, so you never run out of money while you're alive. 

Focus on probabilities rather than prediction

Predictions are widely available from people that have no vested interest in your success. The amount of money, time, and energy wasted trying to predict the unpredictable is staggering. Nobody can predict global events, market returns and directions in the shorter term. This is why everything we do is based on probability. Even our active risk-management strategies are based entirely on probability analysis. And they aren't perfect either! There is no perfect "silver-bullet" solution. 

Focus on the things within your control

Navy S.E.A.L.s are known for saying "Do what you can." When things are uncertain, they aggressively get to work to DO SOMETHING. It's far better to play "offense" on your own terms than sit paralyzed. You can never know everything for certain, but you can do what you can. Are risks out there? Sure! Do what you can to mitigate them. But you need to take action to achieve your goals. 

  1. If you haven't already, work with your advisor to answer those important questions by year-end. Click HERE for those.
  2. Fund your important goals first (and live within your means)
  3. Understand your investment strategy and make sure it matches you and your goals
  4. Focus on probability instead of prediction
  5. Do what you can 

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