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7am Saturday

January 4, 2020

Good morning! Welcome to 2020! We have just completed the final quarter, not only of the year, but also the decade. So it’s as good a time as any to reflect back on the market behavior for the past year, and also for the past 10 years. As you’ll soon see it was indeed a spectacular decade!

2019 Year-End Market Update

📈 The short version is that we have experienced a bull market for the entire ten-year period, with no bear market periods (-20% or greater drawdowns) and only a few 10% corrections since June 2009. Market historians will remember that the investors of the 2010s participated in the longest bull market in American history — an event that seemed improbable at the beginning of the decade considering that we were just coming out of one of the most dramatic market setbacks in modern times.

🎊 We ended 2019 with a return of 31.5% for the S&P 500. Over the past 20 years only 2013 had a higher total return (32.4%). Yes, there is a lot to celebrate this year.

  • Every single S&P sector saw double digit returns for 2019.
  • Best sector: Technology +50%….Worst sector: Energy +12%
  • The S&P 500 closed at an all-time-high 35 times during 2019.

4️⃣ Four factors influenced investment performance in 2019: a shift in U.S. monetary policy, the ongoing trade dispute between the U.S. and China, earnings, and the economy. Read more from our firm’s weekly update here.

Below is a great chart with the annual returns for the S&P 500 since 1928. Notice the returns of the last decade in the red box. There was only one down year during the last decade. That was last year. We were down less than 5%. 2018 was also sandwiched between two of the top 3 years of the decade.

🔮 Also worth noting is how the predictions of doom were once again totally off-base. When the Federal Reserve Board stepped in during the worst of the Great Recession, there were widespread cries that the Fed was “printing money” in a way that would lead to massive inflation and/or the bursting of a stock market bubble. Today, an expansionist Fed is routinely criticized for being too tight, rather than too loose. Inflation, meanwhile, has ranged from 0.7% to 2.1%–which hardly signals a crisis. If you’ve noticed any bubble-bursting in the equities markets, please help me find it.

🤔 So, yes, by any measure, 2019 was a remarkable year for investorsbut who could have guessed? Stocks went on sale in December 2018, and many were predicting that the bearish trend would continue through calendar 2019. But investors who took advantage of the lower prices or stayed the course saw well-above-average gains almost literally across the board. The markets went on sale again in August when there were reports of a very slight inversion of the yield curve in the bond markets which signaled that a recession was on the near horizon. Those rumors turned out to be false and the yield curve–that is, the difference in bond rates between short-term and long-term bonds–had subsequently steepened.

🔥 A breakdown shows that just about every investment asset was up strongly in 2019. Here’s an excellent table from our friends at Bespoke that show’s how ETFs that track various asset classes performed:

Source: Bespoke Investment Group, data as of 12/31/19

As you can see there’s not much red on the chart! A look at investment assets other than US stocks shows that:

  • Even the foreign markets were generous to investors this year. The broad-based EAFE ETF (EFA) that tracks companies in developed foreign economies ended the year up 22.03%.
  • Emerging market stocks of less developed countries, as represented by the EEM ETF, were up 18.20% for the year.
  • Commodities (DBC) finished the year up 11.84%. However, oil prices were up a strong 32.61% while natural gas declined -31.77% for the year.
  • Even bonds had had a good year with the AGG up 8.46%.

So, where will the market and economy go from here?

It’s hard to overstate how unusual this long bull market has been in investing history. Bear markets tend to occur about every 3.5 years, and the previous bull market record was 9.5 years from November 1990 to March of 2000. However, we still have a ways to go to match the 418% gain that was achieved in the 1990s.

Longer-term, it is certain that we will experience a recession, but no person alive can predict the hour or the day. Most economists are reluctant to predict an economic downturn when unemployment is at record lows and the slow-growth economy is chugging along with a 2.3% gain in GDP in 2019.

2020 might see a slowdown in growth if there is another trade conflict with China. Eventually, a shift toward rising interest rates could drive up the cost of debt servicing for corporations that are highly leveraged. Nobody knows where the Presidential impeachment process will go from here.

At the same time, dramatic increases in domestic oil production has lessened the possibility that the economy will experience an energy recession, and healthcare cost increases have moderated over the course of the decade.

Similarly, nobody can predict when or how the bull market will end, how deep the coming recession or bear market will be, or, really, anything other than the fact that all past downturns were followed by upturns which took the markets and the economy to new heights.

So, as we begin 2020 it is worth sharing my overall principles of investment advice:

  • Investing should be goal-focused and planning-driven, sharply distinguished from an approach that is market-focused and current-events-driven. Long-term investment success comes from continuously acting on a plan. Investment failure comes from continually reacting to current events in the economy and the markets.
  • If you are investing for the long-term you should have those funds in equities. This money is working steadily toward the achievement of your most cherished lifetime goals. You should make no attempt to forecast, much less time, the stock market since no one can consistently do this with accuracy.
  • If you accept that the stock market cannot be consistently timed by anyone, then I believe that the only way to be sure of capturing the full premium return of equities is to ride out their frequent but ultimately temporary declines of the market.
  • There have been 15 “bear markets” in equities since the end of World War II—an average of one every five years or so. The average depth of these declines was something on the order of 30%. But in September 1945 the forerunner of the S&P 500-Stock Index was about 161; the Index ended this past year at 3,231. Therefore, at least historically, the permanent advance in equities has triumphed over the temporary declines.
  • My essential principles of goal-focused portfolio management remain unchanged. (a) The performance of a portfolio relative to a benchmark is largely irrelevant to long-term financial success. (b) The only benchmark we should care about is the one that indicates whether we are on track to accomplish our financial goals. (c) Risk should be measured as the probability that we won’t achieve our goals. (d) Investing should have the exclusive goal of minimizing that risk.

Financial Planning Tip

🏦 Is one of your New Year’s Resolutions to save more money? If so, I’ve got an idea for you…⁠

Did you get a bonus, raise, or other increase in income recently? If so, take half of your raise and save it. The other half can be used however you like. ⁠

I call this “The 50/50 Rule of Future Raises”. If you follow this rule, then your savings rate (% of income saved) will grow exponentially and your spending rate (% of income spent) will actually decline as your income grows!⁠

I started doing this several years ago and the results have been impressive! Not only have I increased my savings, but I’ve also been able to enjoy any increase in income at the same time.⁠

This is how people retire early while still enjoying a rising lifestyle! The only difference to your lifestyle is that the increases to your standard of living aren’t as big and fast. That’s not a bad trade-off for actually being able to retire someday within a reasonable time frame, and with a stream of income that covers your standard of living.⁠

The real power of this strategy lies in the fact that you don’t have to make any sacrifices to your current lifestyle while saving an increasingly larger percentage of your income between now and retirement!⁠

Resolve today to follow “The 50/50 Rule of Future Raises” and this will be the path to more financial freedom in the future. ⁠

See my blog post for more on this simple wealth building strategy.

Links, Tips, and Other Good Stuff

The best thing I read this week – A Letter To My Mom by Jeff Okudah. Man, I like Ohio State football and that loss to Clemson was heartbreaking, but stories like this are what it’s all about.

Jess answers one of the most frequently asked questions over my entire career – “Should I pay down my mortgage or invest?”

Something I’m Looking Forward To This Week – The launch of The Invested Dads Podcast! The show will launch on Thursday, 1/9. I’ve had the chance to be part of the planning meetings for this podcast with Josh and Austin over the past couple of months. I can tell you it’s going to be funny, informative, and loaded with practical tips on finance and investing! They plan to launch with THREE episodes followed by a brand new episode EVERY THURSDAY. Here are some links to help you find them and join us on the launch day fun:

  • Visit TheInvestedDads.com where you can listen to every episode after it’s released. Each episode will also include detailed show notes including any links and resources mentioned on the show.
  • To learn more about Josh and Austin check out this page.
  • Subscribe on Apple Podcasts so you never miss a new episode. Be sure to leave a review if you like the show. 👍​
  • If you are in the Findlay area, come to the Launch Party!

In closing, I want to thank you for reading. I hope 2020 is your best year ever!



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