2020. Whew! I’m sure we’re all glad that’s over with, but as they say, beware what you ask for. Thankfully, my clients have stayed healthy and have mostly relegated to focusing on other areas of their lives like work, family, and emotional well-being. That’s great news, as there are many less fortunate who are still struggling.

Obviously, a year like 2020 can take its toll and I’m sure it feels good to get it behind us—but rest assured, the challenges will continue in the years to come. That, as they say, is life, and that is why life planning is so important. Of course, there are no guarantees, but planning your financial future with a mentor who has the expertise and professional tools, spends every day focused on wealth issues, and has an understanding of your situation is so important to improve your odds of success. It’s not free and does take an investment, but the value can be, well, invaluable. 

For my clients, success means having the peace of mind that they, and often future generations, will have enough money to sustain their life goals so they can focus on life, family, and those things that are important to them. There are many lessons learned that are baked into my advice and planning, so let’s look at some of them from 2020.

2020 Lessons Learned (And Relearned)

• Safe, liquid assets are essential during periods of stress. I advised clients at the beginning of this crisis that the markets would work themselves out and the biggest challenge most people would face was cash flow—paying rents, mortgages, leases, etc. Renters, landlords, and small business owners have been feeling the biggest stress in this area. The thing you don’t want to do during periods of stress is to sell equity assets that can provide return above inflation and are cyclically down in value. Having the right amount of your investments in cash and bonds can help you survive these moments and thrive moving forward; it’s a critical part of long-term success. Calculating the correct amount of “safe haven” assets versus growth assets is a science in itself and becomes even more important when you are making distributions, e.g., during retirement.
• It’s always the unexpected variables that make the market move in directions you could not foresee, so don’t try to time the market. Many investors left equities for safer investments in the spring of 2020, predicting that doom and gloom would prevail. What they did not foresee was the magnitude of the impact that the CARES Act and related stimulus moves by the Fed would have on the financial markets. The infographic below shows the S&P 500 index through the year in the top panel and the inflow/outflow of investments into government money market funds in the lower panel. The inflow to money markets was highest at the bottom of the market to the tune of about $350 billion (highest green dot on lower panel), right before the Senate approved the stimulus package and the S&P turned around to a bull recovery. All of those investors who went to cash missed out on a least some of the recovery (assuming they got back in). Missing these moments can have a significant negative impact on long-term wealth. (My previous report discusses this further.) 

• Every crisis creates opportunities. There were many well-positioned companies that did extremely well in 2020. There’s a way to help ensure you own those successful companies during these periods—a quite elegant and cost-effective approach that I typically implement in my client portfolios. Feel free to reach out to me if you would like to discuss further.
• Be patient and don’t give up on the science and academics of investing by chasing what seems to be working recently. Short- and even medium-term trends and performance can mislead investors. It appeared that large growth companies were the place to be until October. (See more on this below.) Patience, staying in your lane, and looking to the science of investing as opposed to the trends in investing have historically rewarded most long-term investors.
• The stock market is most likely the most resilient manmade ecosystem ever created. Over time, the stock market has built wealth for investors, paying little heed to the political leanings of Congress and the presidency, local and global crises, and the failure of sectors in the economy. As long as people continue to try and find ways to do things better and investors are willing to take the risk in investing in those people and their ideas, there will be opportunities that will bring rewards. Granted, there can be some deep drifts downward and it’s impossible to consistently guarantee which ideas will win, but one thing is certain: if you don’t participate in the recovery periods, you don’t have much of a fighting chance. 
• Planning helps you stay ahead of the curve. The majority of my clients made no changes to their investment strategies this past year. Why? Because we had planned for the contingencies we experienced in 2020. 

What’s coming? I won’t make a prediction, but many of the large growth stocks are a lot more expensive today than they were a few months ago and many are saying it’s a bubble for some of the best known stocks. (More on this here.) There’s also the possibility that tax pressures on estates, income, and real property could be heightened and thus strategies for tax efficiencies not only for today’s investments, but tomorrow’s cash flow, will be more in the limelight in the coming years.

On that note, for California residents/real property owners, Proposition 19, which passed on November 3, 2020, could significantly impact real property taxation when passed to children and grandchildren. If you have low tax-base California property in your family and you haven’t done so already, I would highly recommend you contact your estate planning attorney as soon as possible to see if any changes need to be made to your estate plan in general and as they relate to Proposition 19. Time is of the essence, as the law goes into effect on February 16. 

San Luis Obispo County Assessor Tom J. Bordonaro, Jr. put it succinctly in a recent article: 

“Families considering giving their property to their children or grandchildren, should consider doing this prior to the new law which will come into effect February 16, 2021,” Bordonaro said. “Families wishing to pass property as inheritance may be shocked to find that the ability to do this without tax consequences will end as a result of Proposition 19.” 

2020 Q4 Index Review

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2020, all rights reserved. Bloomberg Barclays data provided by Bloomberg.

You’re stuck in traffic and the other lanes are moving faster than yours. Everyone else seems to be moving forward and they are all waving at you, smiling, letting you know. The temptation is to change lanes. So you do. And then of course, the lane you move into slows to a crawl and the lane you just exited moves forward, leaving you well behind. You would have been much better off staying in your own lane. 

Many of you may be familiar with the studies that show historically on average over time, small company stocks have outperformed large company stocks, value company stocks have outperformed growth company stocks, and high-profitability companies have outperformed low-profitability stocks. But in any given year, the opposite could be true and in the recent past, this has been the case. This, of course, was a trying time for those investors who have portfolios weighted toward smaller and value companies. Many I’m sure felt like they were in the slow lane. Boy did things turn on a dime in Q4. As you can see in the table, the Russell 2000 index, a good proxy for small companies, returned 31.37 percent, exceeding by far the return of large company stock (represented by the S&P 500), which returned 12.15 percent for the quarter.

This was a quarter that also rewarded investors who were globally diversified, with emerging markets returning a healthy 19.77 percent as the next highest performing index, followed by Europe Asia Far East (EAFE) at 16.09 percent. 

Ultimately, despite a sequence of epic events and continued concerns over the pandemic, global stock market returns in 2020 were above their historical norm. I’m not aware of anyone who would have predicted this in March of 2020.

Fixed income markets mirrored the extremity of equity behavior, with nearly unprecedented dispersion in returns during the first half of 2020. Large return deviations were also observed between U.S. and non-U.S. fixed income as well as between inflation-protected and nominal bonds. This is another reason to ensure you are well diversified in your bond allocation.

For the quarter, the U.S. bond market was relatively stable, with the Bloomberg Global Aggregate Bond index outperforming the indicated U.S. bond indexes with a 3.28 percent return.

The year 2020 proved to be one of the most tumultuous in modern history, marked by a number of developments that were historically unprecedented. But it also demonstrated the resilience of people, institutions, and financial markets—was also a validation that having a plan and sticking with it can result in unexpectedly good results. 

Happiness, health, and success in the New Year!

Morgan is an investment advisor in San Diego, Calif. He is registered with the Securities and Exchange Commission (SEC). Registration of an investment advisor does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the commission.  Morgan only transacts business in states in which he is properly registered or is excluded or exempted from registration. A copy of Morgan’s current written disclosure brochure filed with the SEC, which discusses among other things, Morgan’s business practices, services, and fees, is available through the SEC’s website at www.adviserinfo.sec.gov.

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