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INVESTOR LETTER - JANUARY 2020

INVESTOR LETTER - JANUARY 2020

January 14, 2020
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As we start the 2020s, we thought it would be interesting to look back at the major themes that defined the 2010s. We’ll skip the geopolitical factors, the rise of social media and the evolution of smartphones to focus on investment themes. The following four investment themes do a fairly good job of summarizing the factors that influence our portfolios:

  1. U.S. stocks popped. The U.S. stock market generated substantially higher returns than virtually all other asset classes and delivered those returns with markedly low volatility compared to more typical periods. In fact, looking at every decade from the 1930s through the 2010s, the 2010s had the highest risk-adjusted returns of all nine decades.
  2. Non-U.S. stocks flopped. Consequently, international developed and emerging markets stocks generated much lower returns than the U.S. stock market. Over the 2010s, the U.S. market generated annualized returns of 13.6% while international developed and emerging markets stocks earned annualized returns of 6.3% and 4.8%, respectively. Of 49 country stock markets tracked by MSCI, a well-known index provider, the U.S. market had the highest return.
  3. Value not as valuable. Value stocks, which are stocks that trade at relatively low price-to-earnings ratios, earned meaningfully lower returns than growth stocks, which are stocks that trade at relatively high price-to-earnings ratios. This contrasts with the longer-term academic evidence showing that value stocks have tended to generate higher returns than growth stocks.
  4. Interest rates limboed lower. How low can they go? Apparently, the answer was lower. Interest rates remained low over the entire decade, leading to relatively low returns on most fixed income investments. The 10-year Treasury yield started 2010 at 3.85% and ended 2019 at 1.92%.

This list reminds us there are no guarantees when it comes to investing. Think back to January 2010. The U.S. had just experienced a lost decade—where the U.S. market lost money over the decade—and most investors feared low equity returns or a double-dip recession as we entered the new decade. Neither happened. In fact, quite the opposite occurred.

What will the next decade hold? Since there are no guarantees when it comes to investing, the honest answer is that we don’t know. And, we don’t think we should rely on so-called economic or market experts to tell us.

We handle market uncertainty differently than most. We use academic research and real-world evidence to help us develop an investment philosophy that takes a lot of the guesswork out of investing. This philosophy aligns our investments with factors of return that can potentially add value to our portfolio and diversify into multiple asset classes so we can potentially avoid some of the extremes that accompany investing. In our mind, it allows us to reap the potential benefits of uncertainty.

We are here to help you reach your financial life goals! We wish you and your family a very prosperous new year.

Data sources Ken French Data Library, Bloomberg, MSCI and St. Louis Federal Reserve. Long-term investing neither assures a profit nor guarantees against loss in a declining market. Past performance does not guarantee future results. Stock investing involves risks, including increased volatility (up and own movement in the value of your assets). All investing involves risk, principal loss is possible.