Last fall we sent out our annual portfolio review letter discussing some of our thoughts from 2019 and some of our forward-looking expectations for 2020. Here we are, roughly half a year later and living in a very different world. Recently, we took some time to re-read that letter and we have a few thoughts that we wanted to share and a few important points we want to reiterate as we look towards the second half of 2020.
· 2019, by many accords, was a very good year from an investment perspective. We had a rebound from a rocky end to 2018 but had very strong growth above and beyond that recovery. Even with that, we were reminding people to stay the course. When times are good or bad, we have to stay the course. It is important to remember that we have designed your financial plan and/or your portfolio to endure both strong and weak economies and market conditions.
· While it doesn’t appear great right now, and rightfully so, our economy was very strong heading into this pandemic. With each passing day of lockdown’s and stay-at-home order’s it feels like our economy is becoming a shell of what it once was. Finally, we are starting to see a glimpse of a slow return to normalcy. It is important to keep in mind we will return to a strong economy again.
· A couple letters ago we talked about a behavioral bias called loss aversion. This is the phenomenon where investors have a stronger desire to avoid losses then to obtain gains. There are several types of biases when investing for both clients and advisors alike. To be successful, we have to understand we all have biases and we must work to mitigate them when making decisions, both large and small. During periods like this, we often see biases surface such as…
o Illusion of Control – thinking we can control investment outcomes, even though we cannot.
o Recency Bias – overemphasizing more recent events than those in the past.
o Self-Attribution bias – crediting success to talent and skill, but blaming failures on events beyond our control.
o Confirmation Bias – emphasizing ideas that confirm our beliefs while also devaluing ideas that contradict.
o Hindsight Bias – remembrance of our predictions of the future more accurately than they actually were
o Overconfidence Bias – unreasonable faith in our own judgement, reasoning and analytical abilities.
While these are only a couple of biases we may exhibit, keeping biases under control will allow for us to keep moving forward in an objective way to accomplish our goals that we have set.
In our review letter sent out last fall, we also discussed investor “edginess” and how we were going to combat that to keep portfolios positioned in the best way possible when it occurred. We replaced a couple positions in order to help us accomplish our objective of reducing volatility and correlation, while trying to be mindful of return and risk objectives for each of our clients. We’re sure we have hammered this message home already, but it’s worth repeating: we began preparing for this increase of volatility in 2018 and continued into 2019 and we will continue to monitor our portfolios to ensure we are positioned for the future.
While we don’t modify our portfolios for any particular event, some concepts and events we will continue to keep our eyes on moving forward include:
· Phased re-openings of the economy
· Continued fiscal and monetary actions
· General election in the fall
· Trade negotiations and other geopolitical developments
· Divergence of market valuations from intrinsic valuations
· Evolution of this pandemic and potential medical breakthroughs
This list is far from exhaustive, but are high level concepts that will continue to shape our expectations for the next three to five years.
Lastly, in reviewing our letter from the fall, we talked about looking forward to seeing each of you in our fall meetings. While we had a chance to sit down with most of you, we did not get to see everyone. We encourage you to please take advantage of these opportunities so that we can have a face-to-face discussion about your concerns, your goals, and anything else that may be pertinent at the time.
As always, please continue to stay safe, healthy, and sane as we continue down this path of uncertainty. We look forward to the times when we can meet again in person, but until then please let us know how we can be of assistance.
Ryan Flanders, CFA