Blog post #475
As 2021 begins, the US and the world are very different than they were a year ago.
Financial markets continuously change in response to new information and unexpected events. Stock and fixed income prices move on earnings and future expectations.
What are we seeing and what are we doing?
The way that we manage your investments and strive to help you reach your financial goals are consistent and disciplined, with the flexibility to change as needed.
As uncertainty always exists, we recognize that no one, including us, can accurately and consistently predict the future. For example, no one could have predicted Covid in December 2019. Even if someone had predicted the Covid pandemic, we doubt that they could have predicted and accurately timed the rebound and strong gains in nearly all asset classes since the onset of Covid. Similarly, we cannot predict the continued impact of Covid, how successful/fast the vaccination process will be, or the impact of new Covid strains.
We remain committed to key investment principles, such as broad diversification across many asset classes, utilizing investments with very low costs, and active tax management (as applicable). These are all things that we can control and should benefit our clients.
Asset classes that are performing well so far in January 2021 are many of the same asset classes that performed well late in 2020 (see index definitions below). Over recent months, many asset classes are outperforming US Large stocks, as defined by the S&P 500, which is a reversal of US Large stocks outperforming most other asset classes during recent years. For illustrative and informational purposes, below are selected asset classes and return data for their respective indices that we recommend to clients:
Consider the significant gains in the sample of asset classes provided above, which have occurred since November 1. If we recommended getting out of the market or significantly reducing your stock exposure before the election, or shortly after the election, when many political changes became more likely, you may have missed out on these gains. This is why we encourage you to adhere to your asset allocation plan and focus on the longer-term, not on political proposals.
We do not make investment policy decisions based on political matters, such as potential tax increases or the size of the Federal deficit. Financial markets, which include the stock and bond/credit markets, very quickly incorporate all known information into prices and valuations. The financial markets clearly know about the potential for personal income tax increases on high-income taxpayers and corporate tax increases, even though no one knows what proposals will become enacted or when they will be effective.
We will provide our clients with advice about these tax and other changes, as they affect each person or family. However, we do not recommend basing your long-term investment strategy on political matters, as the stock market has done well under both Republican and Democratic Presidents. There are so many other factors that impact the direction of stocks beyond just who is in the White House or what party controls Congress.
Given the significant gains in many asset classes since last March, and particularly in recent months, we are reviewing client portfolios for rebalancing (selling some stocks) for those clients whose stock allocations have exceeded their IPS (Investment Policy Statement) stock targets. This is the disciplined implementation of buying low (which we encouraged you to do starting last spring) and selling high, after significant stock increases.
We also want to remind you that stocks have increased almost straight up since early November. There has not been a significant decline in the markets (of 10% or more) since the major decline last February-March. We are not predicting a near-term decline but reminding you that 5-10% declines are normal. They frequently occur when you least expect them. You must always be emotionally prepared for these types of pullbacks, which are temporary, not permanent, and a part of investing in stocks.
We hope that information like this is helpful for you to adhere to your asset allocation plan, despite whatever uncertainty and changes are occurring in the world.
Talk to us. We want to listen. We want to assist you, your family members and friends.
US Large Value stocks: Russell 1000 Value
US Small Cap stocks: Russell 2000
US Small Cap Value: Russell 2000 Value
International stocks: MSCI EAFE NR USD
International Value: MSCI ACWI ex USA Value
Emerging Markets: MSCI EM NR USD