The Year We Will Never Forget
2020 is the gift that keeps on giving. The insanity of Covid, the riots in the streets, and a very politically divided country have created one of the most unpredictable election years we’ve ever seen. The stock market, all the while, is going up and seems to be doing its own thing — regardless of what’s in the news.
After going steadily up since the March lows, the market took a breather in September. The S&P 500 lost 3.7% while the NASDAQ 100 gave back 5.6%. That seems bad, until you realize the S&P 500 has gained 31% in the past six months.
For further perspective, consider that after all the volatility, the Dow Industrials is flat for the year and the S&P 500 is up about 5.5%. So far, this has been a textbook case of why you shouldn’t sell out when the market goes down. Everyone who sold back in March is much poorer — but fully understands that lesson now.
The economic outlook is difficult to forecast. We have a recession that was caused by Covid-19. That part is simple. The difficulty is how long it will take us to recover.
The answer to that question is somewhat of a pandora’s box. We need facts to work with, and facts concerning Covid-19 are hard to come by.
Without solid facts, it’s tough to evaluate what’s going on. For example, can we believe any of the data put out? Minor details such as why are the actual death rates 10 times less than the original projections? Why and how are politics involved in a pandemic? Why are some states with better numbers shutting down their economies while others are staying open? Cases are increasing, which is concerning, but deaths are declining. What are the real numbers of people who have died directly as a result of Covid? These questions are just the tip of the iceberg, but when you dig into them, none of it makes sense.
Covid-19 caused the recession. As long as Covid-19 is a concern, certain parts of the economy will be hobbled. Until we get more clarity on what the facts are, with actual numbers and cures, Covid-19 will continue to be a drag on economic growth.
Our conservative portfolio, Managed income, continues to protect its investors and avoid significant losses. In this pandemic environment, there hasn’t been much upside to work with on the yield side. As such, Managed Income is essentially flat for the year at -0.21% year to date. Since its inception at the last quarter of 2001, Managed income has generated an annual compound return of 4.37%, for a total return of 125.32% net of fees.
Our growth portfolio, Top Flight, has had a great year.
For the first nine months of 2020, Top Flight is up 19.97% versus 5.58% for the S&P 500. This outperformance is the result of significant changes we made to this portfolio about three years ago.
Since its inception in 1998, Top Flight has compounded at 11.39% annually with a total return of 1063.18% net of fees. See our track record for all disclosures.
It is important to evaluate how much risk a portfolio takes for the return it generates. The Ulcer Index measures how much downside volatility a portfolio takes. Since its inception 22 years ago, Top Flight has an Ulcer Index of 10.81 versus 16.55 for the S&P 500 — that’s 35% less.
The Upcoming Election
This is the elephant in the room. Everyone asks me, “What about the Election?” Great question.
I remember going into the presidential election in 2016. No one thought Donald Trump had a chance. When he won, that night the futures dropped over 1,000 points because of the fear of the unknown. Then they reversed and moved steadily upward for the next several months. The point is the Dow initially tanked because of the uncertainty of change.
Unfortunately, I do not know who is going to win the election, and I don’t know how that might affect the markets in the short term.
What I do know is that over time, stocks and real estate increase in value much faster than cash, bank CDs, annuities and bonds. That is how asset classes have always worked.
I also know that markets do not like uncertainty. The only thing for certain is there will always be uncertainty. As such, it never seems like a good time to invest. What makes it even more difficult is that it only becomes obvious in retrospect.
For example, going back in history …
- In the 1930s, there was the great depression along with 25% unemployment and massive bank failures. The economy was devastated.
- In the 1940s we had a terrible World War with multi-millions of people killed.
- In the 1950s we had the Korean War.
- In the 1960s we had the Vietnam War, Cuban Missile Crisis, Civil Rights Protests and the assassination of John F. Kennedy and Martin Luther King.
- In the 1970s we had a global oil crisis, major bear market, and the resignation of Richard Nixon.
- In the 1980s we had massive inflation with interest rates at 18% along the 1987 stock market crash.
- We had two Gulf Wars in 1990 and early 2000. And Y2K was an uncertainty-creating non-event that dominated headlines prior to its occurrence.
- From 2000 to 2003, there was a terrible bear market with markets losing 50% of their value. In the middle of that was September 11, 2001 — an act of terror. That was followed by the 2008 housing crash that turned into a financial panic and took the markets down over 50% again.
During each of those downturns, virtually no one wanted to buy. That is why the markets went down so hard. The stock market is an auction, and with no buyers you have no floor — until people start buying again.
In retrospect, if the goal is to make money, that is exactly when you should buy.
Over “time” (that’s the key word here), stocks and real estate increase in value. When you look at the numbers from 1920 until now (even considering all of the uncertainty previously listed), stocks and real estate always go up if they’re given enough “time.” Successful investing is not a short-term endeavor.
It’s interesting to look at the history of Top Flight since its performance is more recent (i.e. the past 22 years). As mentioned, Top Flight gained 1,063% from January 1, 1998 through September 30, 2020. This means $1 million invested in 1998 would be worth $10,630,000 today — an increase of 10 times. To put that in context, those returns were generated during two of the most devastating bear markets in our lifetime. (For compliance, I have to say that past performance is no indication of future results. Please see the disclosures on the last page of this newsletter.)
I wish I knew how this election was going to play out. I don’t. What I do know is there are always reasons not to invest. I also know the best way to build wealth is to invest in stocks and real estate — and give them time to work.
Thank you for letting us manage your accounts. Please reach out if you have any questions or concerns.