On March 23 of last year, during the pandemic-induced market decline, the team at NNP released a video update. In that video, we stated that we felt most of the decline was behind us and that we were due for a rebound at some point. Although this video was certainly prescient, we would have NEVER guessed the market would rally for 8 months to the tune of a 67% gain. In fact, probably no one would have. Although we could discuss why this happened for much of this letter, that is the past and we need to now focus on the future.
As we consider 2021, and for that matter the next several years, it is our opinion that we are clearly facing one of the more challenging times in history for investors. The menu options look like this: cash at a basically zero yield, bonds with minimal yields (and at some point, a high degree of interest rate risk) or stocks and real estate anywhere from fully priced to over-valued. In other words, of the major asset classes, there are no bargains. Layer inflation on top of this menu and the result is negative “real” returns for cash and possibly bonds as well. While we believe that some degree of exposure to cash and bonds may be necessary for defense, negative yields are not a viable long-term solution.
Although equities are arguably on the pricey side, the foundation for gains remains in place. We have said for years that the best recipe for equities is low inflation, low interest rates, and low taxes. Currently, these components remain in place. In fact, we have probably never had a time in history when the Federal Reserve has essentially promised rates will not be raised for several years-offering some support for current stock valuations. In addition, some sectors of the market are certainly cheaper than others and offer solid dividend yields. Finally, we also have a vaccine for Covid-19, pent up demand from consumers, and the highest savings rate since mid-1982.
At the end of the day, we default back to the textbook and the concept of risk premium. Currently the risk-free rate of return is practically zero. Even if equities (as well as other risk assets) produce far below historical returns, it is likely they can exceed the risk-free rate by 3% or more and therefore do their job of outpacing inflation. Obviously, as always, we will have pullbacks along the way, and we are certainly due for one.
Our experience in financial planning builds the case that high-net-worth investors need to grow their assets in order to keep up with or preferably exceed inflation. Sometimes, high-net-worth investors need growth even more than others! Therefore, at a time like this, one must maintain savings and investment discipline and find the proper balance going forward. Maybe returns will be subdued versus history, but the goal has not changed.
Yes, there are a litany of world-wide issues we can worry about: Covid, a new President, the national debt… However, at the end of the day, the fundamentals of investing and sound financial planning have withstood the test of time. As always, our team is ready to help you navigate these markets in the pursuit of achieving your goals.