Last month I wrote about the folly of market timing. In particular, I mentioned how many uncertainties seemed to have resolved, yielding perhaps an “all-clear” signal. While the market did react well with the Santa Claus Rally, events, as they always do, changed quickly. I’m writing this in the midst of the impeachment trial, near the onset of the coronavirus that is echoing the SARS crisis, and after the U.S. killed a key Iranian leader. Trying to keep up with everything is head-spinning so that reminds me to stick to the fundamentals. Here are the key principles that I think we must keep in mind heading into 2020:
- Financial advice must goal-focused and planning-driven, as 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 proceeds from continually reacting to current events in the economy and the markets.
- We are long-term investors, working steadily toward the achievement of our most cherished lifetime goals. We make no attempt to forecast, much less time, the market; indeed, we believe these to be fool's errands.
- My essential principles of goal-focused portfolio management remain unchanged.
- The performance of a portfolio relative to a benchmark is largely irrelevant to long-term financial success.
- The only benchmark we should care about is the one that indicates whether we are on track to accomplish our financial goals.
- Risk should be measured as the probability that we won't achieve our goals.
- Investing should have the exclusive goal of minimizing that risk.
Looking Back at the Last Two Years
- The past two years (2018 and 2019) mirrored each other in a stunning fashion that clearly point out the continued folly in trying to analyze and discern short-term market moves in advance.
- 2018 was a very strong year for the U.S. economy as the Trump tax cuts kicked in, pushing the economy strongly higher amid talk of a synchronized global expansion early in the year. However, the stock market did not follow suit despite strong earnings as it peaked in January and ended the year dismally, partly in reaction to four interest rate hikes by the Federal Reserve. Sharp selling into the Christmas Eve lows nearly triggered the first Bear Market since the Great Recession.
- In 2019 many of the immediate effects of the tax cuts wore off and the economy slowed both in the U.S. and around the world with talk throughout the year of a possible Global Recession. Earnings reversed course, manufacturing went into decline, and the so-called trade war between the U.S. and China heated up. Again, mirroring 2018’s reaction to its strong economy, 2019’s markets reacted very positively to a weak economy. Providing somewhat of a tailwind was the Federal Reserve reversing course and easing three times in 2019.
Musings on Upcoming Year
- Set aside momentarily, if you can, the headline issues of the day: the trade situation, an aging economic expansion, impeachment/election uncertainty, and the like. These are not merely imponderable; they're irrelevant to long-term, goal-focused investors like us. There are no “predictions” from me this year. Seems silly.
- I encourage you to let go of headline news and looking at the market on a daily basis and focus on your financial plan and its objective of providing you with the financial future that you desire.
