For several years now, regardless of our gut opinion, our stance towards the equity market has been to err on the side of caution. What does this mean? Does it mean we advise clients to get out of stocks? Absolutely not! As 2019 has proven once again, attempting to accurately predict and time variable markets can be a dangerous game, potentially detrimental to one’s portfolio return and, ultimately, one’s quality of retirement. It is worth remembering, it’s not just avoiding the market declines that matters – it’s also making sure you participate in the upside. Repeatedly, the market teaches painful lessons to those who second guess. As famed investor Peter Lynch has said, “More people have lost money anticipating corrections than in actual corrections.” The easiest way to make sure you participate is to stay invested.
So, what does it mean when we suggest caution? Typically, being cautious with your financial plan means not taking an undue risk or exposing a portfolio to more risk than necessary. Additionally, caution is having your near-term needs in cash, not equities. Once you determine the amount you are comfortable investing, the portion that is allocated to equities needs to stay invested through good and bad cycles. Caution does not mean get out!
In our 2018 year-end letter, we made the case that 2019 appeared to be a “more attractive environment for equity ownership than the beginning of 2018.” While we anticipated positive returns, we certainly weren’t expecting the size of the gains we experienced in 2019. More surprising was the rally that happened across the board in virtually all major asset classes.
Now, where do we go? Based primarily on historical and empirical data, an argument can be made that equities will experience a modest gain in 2020. That being said, each day the market goes higher, it becomes more expensive; therefore, valuations are on the high side, especially the Shiller P/E. It’s also worth noting that we are experiencing the longest economic expansion in U.S. history, and the S&P 500 is up 378% from the 2009 bottom as of the end of 2019. In other words, the market may go higher this year, but again we advise, err on the side of caution!
John Kenneth Galbraith once said, “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” Remembering these words can be valuable as we try to predict unpredictable markets. At the risk of being boring and old-fashioned, we will stick to the fundamentals of sound financial planning for our clients. This doesn’t eliminate downside but allows us to take the appropriate amount of risk based on the varying needs of each client relationship.
If you’d like to discuss further, give us a call.