Mind Over Markets

January 24, 2020

On January 16th and January 23rd, BDF held its Annual Client Event in Itasca and Downtown Chicago, respectively, with over 400 clients and guests in attendance. For those not able to attend, here is a recap of the event.

Market Review

Chad Carlson, Director of Investment Research, reviewed 2019 – an excellent year for the markets all around. Stocks across the globe enjoyed phenomenal returns. The S&P 500 was up over 31%, developed stocks outside the U.S. were up over 20%, and surprisingly, the biggest winner was Iranian stocks – up 100%! It was also the best year for a 60% stock/40% bond portfolio since 1997.

Digging into U.S. stock returns revealed some interesting phenomena. With technology stocks being the biggest driver of stock performance, the largest tech companies have become even larger. The FANMAG stocks (Facebook, Apple, Netflix, Microsoft, Amazon, and Google) alone have a bigger combined market capitalization than the entire stock market of such countries as China, the U.K., and Germany, for example. However, the bigger these tech stocks get, the riskier they can become. Over time, bigger has not necessarily meant better performance going forward.

Chad also touched on other things that “don’t make sense” in today’s market and economic environment. For one, the percentage of recent IPOs (initial public offerings) for companies that have never turned a profit is the highest its been since 2000. The amount of global sovereign debt with negative yields is at an all-time high. And, the amount of government debt in general, especially in the U.S., seems to have lost its importance as far as the economy and markets are concerned.

In conclusion, even as well as the market performed in 2019 and over the past decade, stocks are not overly expensive, especially as compared to valuations at the end of 1999. This is a reason for optimism as we head into the 2020s.

Mind Over Markets

Brian Portnoy, author of The Geometry of Wealth, spoke about the challenges we face when making investment decisions due to our hard-wired behaviors. In theory, successful investing boils down to simple things:

  • Buy low, sell high
  • Diversify
  • Be informed
  • Be patient

Yet, in practice, investors often do the opposite of what they should, which leads to less than stellar results. There is a “behavior gap” that results in lower returns because of bad decision-making. For example, in the 5 years leading up to the 2008 market crash, money was flooding into stocks, while in the 5 years following the crash, when stocks were incredibly cheap, money flooded out of stocks.

When it comes to investing, it’s important to remember that performance is random, which is why diversification is important even though it means that at any point in time, there will be a part of your portfolio that is underperforming. As Brian phrased it, “Diversification means always having to say you’re sorry.”

Being a well-informed investor matters but having too much information or too many choices can be detrimental. And, being patient is critical. Simple does not mean easy. Trying to beat the market, time the market, mistaking gambling for investing, and watching financial television do much more harm than good.

How does one make things easier? Brian suggested:

  • Planning – not only have a plan but make sure it’s dynamic and updated regularly.
  • Expectations – set reasonable expectations for performance.
  • Risk – more risk does not always equate to more return.
  • Happiness – money does not necessarily buy happiness. Being rich (accumulating things) is not the same as being wealthy (having a meaningful life).

If you are interested in learning more about what was discussed at the event, please don’t hesitate to reach out to your wealth management team.