2020 Crystal Ball

In the most recent episode of AWM Insights, Brandon, Erik, and Justin discuss what is dominating headlines and what is important to know. This week’s narratives include the fiscal stimulus adding to the national debt, the possible weak dollar from all the money creation, and the possibility of higher inflation that is top of mind for investors.

How would you have invested in 2020 if you knew the future?

“What if January 1st of last year I gave you the cheat code? I gave you the crystal ball that actually worked. We saw that we were going to lose hundreds of thousands of people to some virus that originated outside of the U.S. I won't go down that path, but let's just pretend that I told you all these hundreds of thousands of people were going to die.” -Brandon

This is why market forecasts are wrong almost all of the time. Predicting the future and predicting how the market reacts to that future are two completely different things. If you would have shorted the market, which just means to bet against the market, you would have lost money in 2020. The people that bailed and sold out of the market in March lost a tremendous amount of money when the market rallied. Behaviorally, after selling out, it is almost impossible to get back in because you have to admit you were wrong and panicked. You can devastate your wealth and financial security when you guess wrong.

Brandon continues: “What are you going to do? Erik, you hit the nail on the head. I'm selling out. I'm getting out. There's no way that markets are going to do well. What we all know in hindsight is that would have been the absolute worst thing for you to have done. If you would have done that, the repercussions on your long-term returns are absolutely destroyed.”

How can you be a long-term investor?

The first step is to acknowledge and recognize long-term investing is not as exciting as the gambling that is stock-picking and trading. As has been discussed on previous podcasts, the resources and competition in public markets for outperformance is so great there is not much, if any, left for an individual investor.  

This doesn’t mean you can’t allocate to proven evidence-based sources of return that give you the best chance to outperform. See Travis Chick’s latest blog for more details on where returns actually are derived from.

Your public market portfolio is only one piece of your financial structure. A protective reserve that allows you to make it through the rough seas of recession and market crashes is absolutely necessary for every investor. Human capital is something many advisors ignore but is the greatest driver of wealth for virtually any person. Most advisors focus on only the investments part of financial well-being to the detriment of that person.

Can anyone pick the best performing individual stocks or countries ahead of time?

There are 60 major stock exchanges around the world. There is no requirement to restrict yourself to only US markets. The beauty of global diversification is that you do not miss out on the best performing countries because you are invested in all of them. Contrary to our home-country bias, the US is not always the best performer. Justin breaks down the best performing countries of 2020: “Number one was Denmark, little, old Denmark, almost 43% rate of return, just under that. Then we had Sweden, Netherlands, Finland, and New Zealand all ahead of the U.S.” This is for developed economies around the global. The emerging market economies also had outperformers that benefitted globally diversified investors. Diversification also applies to the bond market and not just holding US bonds.

“I think to your point, as you read these countries, what we're saying is one of the best things that we can do at times is to actually zoom out, take a look at, ‘What is it that we're trying to achieve?’ It is to grow our wealth in a risk-adjusted way, meaning, ‘What does the evidence say?’ We have this tagline, ‘To help you capture the returns you deserve.’ It's because you've worked so hard for this money that we don't want you to miss out on what the evidence says.” -Erik

Risk is one of the hardest principles to understand in finance. Just ask Lehman Brothers, Long-Term Capital Management, James Cordier, ETN derivatives that are constantly blowing up, the thousand hedge funds that blew up in the financial crisis, Gamestop short-sellers, the list goes on. Stewarding and growing wealth is not as hard as it would seem if you can “focus on what you can control.” If you can stick to a plan that has the highest probability of success you will reduce much of the uncertainty that plagues most investors. Be wary of financial salespeople that propose high returns with low risk. I keep track of all the blow-ups so will include some of them at the bottom.

“There’s a sucker born every minute”

PT Barnum’s famous quote is perfect for how the financial media is a circus. Scary, pessimistic, grandiose news drives eyeballs. Smartphones and their notifications drive investor greed during bull markets and investor pessimism during crashes. Your brain is not equipped to handle this amount of information and sticking to your long-term plan is harder than ever.  

“We are bombarded with 4,000 to 7,000 messages per day. We've got a saying around here, ‘Focus on what you can control.’ All those messages, all those advertisements are doing is trying to pull you off of that focus, drag you into FOMO, drag you into, ‘Hey, I'm going to see Tesla a thousand times, so I'm going to go buy Tesla as my individual equity.’" -Brandon

As has always been the case, long-term investors that stay diversified, control expenses, and minimize taxes will end up building wealth for generations to come.

Other financial instrument that destroyed wealth:

●     ETN Liquidation

●     Negative Oil Prices

●     VIX Blowup

●     Coronavirus Hedge Fund blowups

●     When Genius Failed, by Roger Lowenstein