Monthly Outlook: February 2020
The new year started off strong with a nearly 3% rise for the S&P500 during the first three weeks. But it couldn’t hold it and gave back 3% during the fourth week of January for a net 0% month. International stocks lost 3.4% probably due to concerns about Brexit happening on January 31st and the coronavirus spreading rapidly. Bonds gained 1.9% as interest rates continued to slide. Gold was the star of the month, gaining 4.2%.
As we move into 2020 Month Two, U.S. politics are going to heat up. The impeachment is nearly over, the primaries are starting up in earnest, and opinions are going to fly. In this environment, you may appreciate some facts and truths. Below, we present 7 things that are true about markets:
#1 How You Get There Matters
Consider two portfolios. The first returns +8%, +8%, +8% for three years. The second returns +25%, -25%, +24%. Both average 8%. But $1,000 in the first portfolio grows to $1,260 while the second portfolio only grows to $1,163. Steady wins the race. The lesson is “Avoid the Big Loss.” iFolios is designed to do that because we trim back down-trending holdings.
#2 Gold is a Rock
Gold doesn’t do anything, it’s a rock (ok, metal). But the dollar is just paper. Forget the rules of “Rock, Paper, Scissors.” Today, rock beats paper. Gold is a rising asset while dollars are not. Central banks systematically create more credit and dollars over time. People have told me that a loaf of bread used to cost a nickel. The bread hasn’t changed, the dollar has de-valued. To maintain wealth, we need to do more than gather dollars. We have 10% of our growth assets invested in gold today.
#3 Bear Markets Don’t Happen Above the Trendline
Every single bear market happens below the trendline (200-day moving average). It’s math. For any market to go down 10%, 20%, 50% – it must first cross through various moving averages. Today, every market, including stocks, bonds, and gold are all above their trendlines. We are not in a bear market. We remain heavily invested, but watchful!
#4 Stock Picking is Really Hard
Most investors are lured into stock picking. It’s exciting to pick a winner. Standard & Poor’s updates their research every year that proves that 90% of managers do NOT beat their market over a 10-year cycle. Even stock-picker Warren Buffet says that most people would be better off using index funds. Our iFolios strategy builds portfolios with index funds and manages how much we have invested in any market, based on the trend.
#5 You’ll Drive Faster with Good Brakes
How fast would you drive if you had no brakes? Not very. Similarly, how much would you invest in volatile stocks if you could never sell? iFolios uses a variable-speed strategy that allows us to over-weight (speed) and under-weight (brakes) every holding, depending on the conditions of the road (economy/trend). We think that just makes common sense.
#6 Markets Go Up and Down
Historical data back to 1928 shows that the S&P500 has been down 33% of the past 92 years. And 20% of the time, it’s been down >10%. With that track record, we refuse to agree that “buy & hold” makes sense.
#7 Valuation Still Matters
Analysts use various methods to measure the valuation of markets like “Market Cap to GDP” and “P/E” and “Price/Sales.” These valuations metrics are very poor at predicting the next 12-month move but are quite good at predicting the next 12-year outcome. Today’s valuations are at record HIGH levels and strongly suggest that the next 12-years will be well below average. We’re mindful of valuations, but…we’ll stay invested as long as assets are, in fact, trending higher. We’ve used these 7 Truths to create iFolios. We use index funds to build portfolios, we actively manage the overall allocation, and we’re focused on avoiding the big loss. It works.