Note: I may have the ability to take on private wealth management clients in 2021 (fixed fee, 6K per year). Join the waitlist by emailing mccauleycapital@outlook.com.
So much of the investing advice you have heard over the years relates to creating an investing process that helps you overcome the natural pitfalls of human behavior. If an investment professional is telling you:
“to invest in index funds,” they might mean “most people are terrible at picking stocks, your investment returns will improve if you don’t pick individual stocks”
“to dollar-cost average into the market,” they might mean “make your investments free of emotions”
“automate your savings” might mean “humans often spend whatever cash is available to them (and sometimes more) if you don’t set money aside before you have a chance to spend it you won’t end up saving money at all”
This happens throughout life, people aren’t often as direct or articulate as might be ideal. However, when enough of this “translation” becomes commonplace the true messaging can get lost. In 2020, one key (often overlooked) principle drove returns - staying invested in times of uncertainty, turbulence, and even high-valuations. This extraordinary year was unique from an investing perspective, throughout the year one could have easily argued that the right thing to do was to sell stocks and move into “safer” positions, cash, bonds, gold, or Bitcoin (that’s a joke :)). The stock market started 2020 with high valuations relative to market history (more on this shortly). In March, the stock “fell off a cliff” without fears about the pandemic (and its potential impact on the economy). Yet, when we zoom out and look at market performance for the year. The S&P500 is up 13% (light green), NASDAQ up 40% (yellow) and the Dow is up 4% (blue).
And thus, in a year where there were all sorts of reasons to move away from equity investments… the stock market (I’ll focus on the S&P 500 from this point forward), did what it does most commonly - it returned somewhere between 10-20% annually (returns by year are shown below). Most experienced investors have learned this point over the years, there are several compiling reasons to sell your investments in any given year, but when you stay invested you will be rewarded handsomely.
Inquisitive minds will immediately understand the point above and jump to a more interesting question - “surely you aren’t telling to stay invested at these insane valuations, are you?” Well, it depends on your situation (many people with long time horizons and sounds strategy should stay the course), but I’m not saying you should completely disregard valuations either. As a value investor, I believe in buying undervalued assets and it’s hard to argue that US equities are undervalued at the moment.
Analysis from the Leuthold Group. Valuations from Feb 2000 vs. Nov 2020.
All the valuation factors “of the median stock in the S&P” are currently greater than they were at the peak of 2000. So, it’s easy to argue that current valuations aren’t sustainable and mean revision is coming, but that doesn’t mean that you should move to cash. High valuations in the US mean you should consider investing more of your capital in international markets, or focus more on a value strategy in the US (recommended reading here - Global Value: How to Spot Bubbles, Avoid Market Crashes, and Earn Big Returns in the Stock Market). Staying invested has rewarded investors in the past, and the future will be no different. Don’t let the true message get lost in translation, the bad habits created by trying to predict future returns will do more damage over the long-term than any possible savings they can provide in the short-term.