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BMT MONDAY MARKET INSIGHTS – 12/30/2019

Market Insights

For the week ending December 27, 2019

This publication is provided by BMT Wealth Management.

A Time to Reflect…and Look Ahead

This time of year, we all sit at the intersection of the past and present. Especially as an entire decade comes to a close, we are given the opportunity to think about what has been accomplished, what we have learned, and what we hope for in the years ahead. As it relates to financial markets, the 2010s ended with a bang. With two trading days remaining in 2019, the S&P 500 will likely produce a total return greater than 30.0%, which means almost 260.0% over the last 10 years.

The years since the Financial Crisis have been extraordinary in many ways. To name a few: the longest U.S. economic expansion on record, unusually slow economic growth, unusually high stock market returns, unexpected political outcomes, and the birth of negative interest rates (perhaps the strangest). In all cases, these outcomes were predicted by very few investors, only obvious now with the benefit of hindsight.

As we look ahead to 2020 and beyond, one thing we can be sure of is that there will be many more unforeseeable occurrences that will be part of what shapes the investment landscape. If the history of financial markets teaches us anything, it’s that things that have never happened before, happen all the time. What might have worked in the past doesn’t always work now or in the future, and expecting the unexpected is the best way to control our emotions when things don’t go as planned.

Perhaps human nature – and the way people respond when unusual things happen – is the most valuable thing we can learn from studying the past. It seems to be the thing that changes the least, and it will always have a profound impact on the way markets behave.

Key Themes

As we prepare for the year ahead, how do we think about investing amid the realization that unpredictability is always a feature of financial markets? First, we always start with rigorous analysis to determine what we believe are the highest probability outcomes. Uncertainty is not an excuse for apathy, and we work hard to develop a logical point of view that is well supported by facts and data. This will always be a critical input to the investment choices we make.

Beyond this process, relying on key rules or principles to help guide our investment decisions is the best way to navigate perpetual uncertainty. Leaning on these foundational philosophies helps ground our decision-making process. Collected over the years, we thought we would share five as food for thought as another year comes to a close:

  1. Investing is about probabilities, and nearly all probabilities are less than 100%.This means you will be wrong on occasion, even when the odds were in your favor. “Being wrong is part of the process. Survival is the only road to riches.”[1]
  2. Diversification and asset allocation protect us from our inability to predict the future.[2] A thoughtful and purpose-built asset allocation is the foundation of investment success. Investments cannot be viewed as singular holdings in a vacuum. We must understand how each holding interacts with the other, resulting in a holistic portfolio that is durable and diversified.
  3. “It was never my thinking that made the big money for me. It was always my sitting.”[3] Being patient is truly the key to long-term investment success. The best investment strategies are the ones you can stick with over time.

S&P 500 Mediam Total Return

Source: Charlie Bilello. Compound Capital Advisors. December 2019

  1. “Reversion to the mean is the iron rule of financial markets.”[4] Especially when it comes to volatility and sentiment, extremes don’t last long. Periods of low volatility are always followed by periods of high volatility (and vice versa), while periods of pessimism are always followed by periods of optimism (and vice versa).

Voltalitity Index-VIX

Source: Charlie Bilello. Compound Capital Advisors. December 2019

  1. Always be humble enough to admit when something we want to be true, isn’t.[5] Conviction of one’s beliefs is an important component of being a successful investor. It is what allows one to stick with something even when it appears that it is not working. However, when the evidence becomes irrefutable, be flexible enough to change course.

[1] Quote from Peter Bernstein via “What I Believe Most”. Morgan Housel. July 2017.

[2] Charlie Bilello. Compound Capital Advisors. December 2019

[3] Edwin Lefevre. “Reminiscences of a Stock Operator”. 1923

[4] Jack Bogle, Founder of Vanguard

[5] “What I Believe Most”. Morgan Housel. July 2017.

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