MWA 2020 Decade in Review and 4th Quarter Update


The year 2019 offered investors strong returns in many major asset classes and capped off an attractive decade of gains.  Figure 1 below shows the 10 year returns for a global stock portfolio.  Large US growth stocks, the major type of stocks owned by many investors, especially inside their retirement accounts, have performed even better than a globally diversified portfolio, and well above their historical averages.  The same is true for commercial real estate.  A common lesson we can pull from history, is that nothing can last forever.  With global growth slowing, political uncertainty brewing, and more tension likely to surface with the trade war, I think all investors need to be comfortable with their defensive resources available in their financial plan, should a reason surface that warrants turning to it.

Here are common assets we believe can provide portfolio protection: Cash/Money Market/Cash Value, High Quality Fixed Income, HELOCs, some alternative assets, and future savings.  When markets pull back, and they eventually will, we want investors to view the decline as an opportunity to invest their defensive funds in addition to portfolio rebalancing.  These strategies should add to long-term returns because they force investors to buy lower and sell higher.  Because taxes can be one of the bigger costs that can siphon off gross investment returns, these strategies tend to be more tax efficient than dancing in and out of markets.  For clients who are approaching retirement or who are currently in retirement, now is a good time to reassess how much cash or short-term savings to have on hand.  If you would like to review or create a formal withdrawal policy or an MWA Lifetime Income Plan (LIPP)TM we are here to help.

Figure 1:

The MSCI All Country World IMI Index, which includes large and small cap stocks in developed and emerging markets, had a 10-year annualized return of 8.91%.  From a growth-of-wealth standpoint, $10,000 invested in the stocks in the index at the beginning of 2010 would have grown to $23,473 by year‑end 2019. 1

In regard to the recent US/China trade deal that was signed, we would caution investors that in spite of the agreement being signed, the risk that tensions flare up with China in the new year still exists.  This is especially the case if China fails to follow through on its commitment of goods purchases, commitments they had said they would adhere to, only if there is market demand and conditions supported them.  As such, we would characterize the Phase 1 deal as welcomed, but more of a fragile truce than a permanent settlement.

I know everything you read or see in the media is cautious and warns of a market pullback, but don’t forget markets don’t have to go down soon just because valuations are high.  Take 1877-1907 for instance.  That bull market lasted for 29 years.  More recently, the great bull market of 1982-2000 lasted for 18 years.  When I started investing in college in 1995 markets were extremely expensive, but 1996-1999 were incredible years for the US stock market as judged by the S&P 500.  According to Slick Chart.com2, in these 4 years the S&P500 increased by 22.96%, 33.36%, 28.58%, 21.04% (that would have been tough years to miss.  An article from Advisor Perspectives states, “…by comparison, the current bull market is only 10.7 years old – still a relative youngster in historical terms.”  Is that an argument for going all-in at this point?  No, because that would be just as dumb as going all-out.”3  We recommend that investors, leverage diversification and build up enough defense that they can easily stomach and tolerate the inevitable declines that will eventually occur.

Information gleaned from, Research Affiliates in their article: Forecasts or Nowcasts?  What’s on the Horizon for the 2020s4 explores future investment returns and the dividend yield from the major investable asset types.  The top 3 highest expected returning assets are Emerging Market Equity, Developed International Small Companies, and the Emerging Market Bond categories.  In Figure 2 below, I think it is easy to see that over the long run Emerging Markets have offered higher returns than US markets.5  This is mostly because these markets are riskier as judged by annual market volatility.  Over the last decade, a stronger dollar combined with trade instability has caused emerging markets to underperform US stocks (Figure 3), making them a much better relative value going forward for risk tolerant investors that can stomach swings up in down in the market price.  Portfolios owning emerging markets should boast greater diversification, higher dividend yields, and higher expected returns than those that exclude this unloved area of the market in the future.  From a strategy standpoint, as value investors we want to own more of unloved areas of the market.  I think investors should ask themselves how much can I stomach?

Figure 2: Performance of Asset Classes inside and outside the US.4

Figure 3: US Stocks outperformed the rest of the world in the 2010s 3

Historically non-US asset classes are considered higher risk assets, because they exhibit higher volatility in dollar terms.  According to projections from Research Affiliates, their research suggests that investors who have the typical 60/40 US heavy portfolio allocations are unlikely to generate the 4-6% expected returns needed to cover most retiree withdrawal rates, because US valuations are higher than normal, so future returns are likely to be lower than normal at some point.  If inflation were to resurface causinginterest rates to rise, that would likely create another headwind that may lower long-term returns.  If the Research Affiliates long-term estimates turn out to be near the actual returns realized in the future, in order to generate 4-6% net of fee returns, undervalued investments such as emerging markets, international small companies and emerging market bonds must be owned in greater quantities than normal.  Higher valued assets like real estate & US large growth companies will need to make up lower than normal weightings.

As you can see from Figure 46 below when viewed from the Return on Equity metric both the MSCI Emerging Market Index and the MSCI World Index trade at significant discount to the US and more developed markets.

Figure 4: Emerging Markets are trading at a value compared to the US

To counter-balance higher volatility that is likely to come from holding greater weighting of international or emerging markets investments, investors might consider holding more cash or liquidity than normal.  Doing so might make riding through portfolio volatility easier to stomach.  If you equate investing in stock markets like riding a roller coaster (like the Texas Giant), the only way to get hurt is to get off in the middle.

In an effort to save you time, I have linked to several additional articles of interest that you can come back to later if desired.  If you have time, please read these articles as they are chalked full of good information, stories, and lessons.  Below, I have included descriptions and explanations of why I included these articles or links in this report.  Enjoy and thanks for letting us help you and your family create your plan to accomplish your goals.

–Michael Mills

1 The 2010s a Decade in Review,

2 S&P 500 Returns,

3 The Dice Man Cometh,>

4 Forecasts or Nowcasts,

5 Emerging Markets Underperformed,

6 Emerging Markets Outlook,

Other Recommended Pages:

Q&A on MWA Core+ Portfolios

Articles of Interest Going into 2020

4th Quarter Market Review (Slides)

2019 Annual Market Review (Slides)