January 2021: Shaping Portfolios & Generosity
MODERNIST’S ASSET CLASS INVESTING PORTFOLIOS ARE STRATEGICALLY INVESTED WITH A FOCUS ON LONG-TERM PERFORMANCE OBJECTIVES. PORTFOLIO ALLOCATIONS AND INVESTMENTS ARE NOT ADJUSTED IN RESPONSE TO MARKET NEWS OR ECONOMIC EVENTS; HOWEVER, OUR INVESTMENT COMMITTEE EVALUATES AND REPORTS ON MARKET AND ECONOMIC CONDITIONS TO PROVIDE OUR INVESTORS WITH PERSPECTIVE AND TO PUT PORTFOLIO PERFORMANCE IN PROPER CONTEXT.
A Taoist story tells of an elderly man who accidentally fell into river rapids that led to a high and dangerous waterfall. Onlookers feared for his life. Miraculously, he came out of the rapids unharmed when he reached the bottom of the falls. People asked him how he managed to survive.
“I accommodated myself to the water, not the water to me. Without thinking, I allowed myself to be shaped by it. Plunging into the swirl, I came out with the swirl. This is how I survived." (1)
Reflecting on 2020 as an investor
Brace yourself, but I’m asking you to reflect back on your experience as an investor in March 2020 when the government shutdowns were starting. Think about the forecasts and predictions being made. Remember late March, when the S&P 500 had sold off over 30% of its value from its high in the middle of February, and small caps had sold off even more. (2)
As an investor manager, I called our clients to hear how they were holding up and to remind them of the long-term plan that their portfolio continued to support. Most of them reassured me (!) that they remembered our many conversations about separating our financial decisions from our emotional response to market news and media frenzy. Most were more worried about their family, neighbors, hunger, and unemployment than the state of the stock market.
Nevertheless it is important to build our awareness as investors, so looking back on early 2020 markets and the dreary expectations at the time, ask yourself: as an investor did you expect global markets to post double-digit returns for the year? Would you have guessed that emerging market stocks would perform in line with the S&P 500 for the year, with both markets up over 18%? (3) What about small caps? Would you have expected U.S. small cap stocks to return 20% for the year when there was so much uncertainty around whether many of these companies could survive the pandemic? (4)
The changing business landscape due to COVID benefited some market-listed companies like Amazon and Zoom, providing some intuitive reasoning for their growth during the year. But would you have expected Tesla to post such extraordinary gains? Buying electric cars when far fewer people need to commute? My family’s already low gas spending was practically nonexistent in 2020!
Tesla stock closed 2019 at less than $84 per share, but by the end of 2020, it was trading at over $700 per share. (5) Tesla was added to the S&P 500 in December with a total market value of over $600 billion, making it the largest stock ever added to the index. (6) Looking back, we would like to believe we saw it coming (or at least that the signs were there), but doubling down on Tesla in January 2020 looked like a bet against the ‘smart money.’ At the end of 2019, roughly one out of every five shares of Tesla were betting on the stock price falling, not going up! (7) We’re hopeful that the excitement around Tesla points to continued energy and momentum towards ESG investing (environmental, social, governance factors).
Timing the market doesn’t work
When we look at 2020, we’re reminded that whether we are talking about industries or individual stocks, predicting market performance is extremely difficult. Some people get lucky, but an investment manager with the skill of repeat performance is extremely rare. A recent study performed by S&P Dow Jones found that the top performing funds from June 2010 through June 2015 were more likely to liquidate or change their investment style, rather than continue to outperform over the next five years.
And that is the smart money – these are the funds managed by professionals that market their outperformance, convincing investors to invest millions in their ability to be the best, to have the edge, to beat the market. All long-term evidence to the contrary. That is a loser’s game, so we choose not to play it. You have worked too hard to accumulate your wealth.
Instead, we design our portfolios to flow with the markets, not to time or attempt predicting the markets. We invest across hundreds of stocks, dozens of countries, and all sectors, often with an eye to the environmental and social impact of those investments.
In 2020, amidst all kinds of uncertainty, we continued to abide by the tenets of an evidence-based investment strategy. We rebalanced our portfolios to take advantage of lower prices. We tax loss harvested to offset capital gains in other areas of our portfolios. We continue to balance the stock risk in our portfolios with high quality fixed income to dampen changes in total portfolio value. We focused on what we could control. We stick with the strategy we decided on before the inevitable rollercoaster of emotions kicked in. In other words, we plunge with the swirl, and we come out with the swirl – this is how we help our clients progress towards a successful retirement.
keeping an eye on wealth inequality
Of course, we’re also keeping our eye on wealth inequality. We and our clients are grappling with the fact that the vast majority of Americans are not worried about their portfolios, but rather how they’re going to keep a roof over their head, feed their kids, while keeping themselves and their neighbors safe from the spread of Covid.
As Politico noted in a recent article on the K-shaped recovery, “The reality is that the wealthiest 1 percent of Americans own 50 percent of the value of stocks held by individual households, and the top 10 percent control 88 percent.”
We continue to recommend structures and strategies that aim to remedy the terrible effects of an economic system that only benefits a few.
If you have questions about your investments, charitable giving strategy, or are looking for a partner to help you make progress towards your financial goals, reach out. We’re ready and happy to help.
Georgia + Team Modernist
