Dorato News, January 2021
Updated: Apr 2, 2021
Portfolio Issues — Long Term
In the Market View section, we try to give you a sense of what to expect from the markets over a fairly short period, such as the next year. It’s also worthwhile to think about the long term.
We’ve mentioned bubbles and bubble behavior. The top five (and with Tesla, six) stocks in the S&P500 look quite pricey. We use several research services, and all of them say the stock market is probably priced above fair value.
The logical consequence of this is that stock market returns over the next 5-10 years will probably be below average. Where actual returns finally end up is anybody’s guess, but it’s probably too optimistic to expect that we’ll get the long-term average of 10% returns during the 2020s.
That doesn’t mean all is lost and that you hide your life savings in your back yard. Cash earns 0%, so if there’s inflation, which we think is likely, your savings will lose value if you keep it in cash.
What it does mean is that you will need to be attentive to the little things that add value to your investment portfolio. Pay attention to fees. Rebalance when other investors give you the opportunity to do so. You know they will give you that opportunity; they always do. Do not try to time the market, getting in and out based on a gut feel of where the market is headed next.
Even priced at a high level, stocks offer one of the better long-term investment options. An investment in US stocks is essentially an investment in the United States. We have problems to overcome, yes, but we still have a fantastic system for generating long-term wealth. That’s what we’re buying into.
“Can I have my allowance in Bitcoin?”
Market View — Less Eventful
2020 has been one of the more trying years for an investor. We had Covid, of course, and economic lockdowns. Those lockdowns caused a recession, which required an extraordinary government response, and a massive amount of new debt. We had investors piling into a relatively small subset of stocks (e-commerce, e-vehicle, e-whatever), some of which made a profit on their business, some of which didn’t. Diversification was a bad word; the more diversified your investments, the worse your performance. We had a dramatic sell-off in stocks, followed quickly by a dramatic rise, a pattern to cause a stomach ache in even the heartiest of souls.
We do expect 2021 to be a bit less eventful. The threat from Covid will recede. Probably by June, anyone who wants a vaccination against the virus will be able to get it. This will allow people to move around freely again, with a virtuous circle of higher spending and higher employment reinforcing each other.
The new administration in Washington will make some changes, but they are likely to be changes that both Democrats and Republicans can agree to. What’s confusing for businesses and investors is when the policy pendulum swings widely from administration to administration. Stability makes investing decisions for both businesses and individuals easier.
Good news comes from the banking sector. The Federal Reserve has completed it’s latest stress tests on banks and determined that they are in excellent shape. The terrible stock markets of the Depression, of 1973-1974, and of 2008-2009 were made worse by the weakness of the banks. That weakness acted as an accelerant to a fire. We do not have that situation now. So banks are more likely to act as a fire wall than an accelerant.
There will continue to be challenges. One is the debt burden of the federal government. We’re up to $27 trillion and counting. At some point investors start to focus on the size of that debt and demand a higher interest rate, but we don’t know when that point is.
Inflation may start to become a problem. We’ve had higher-than-average inflation in health care, housing, and education for years because those sectors aren’t subject to foreign competition. As the world cuts back on foreign trade, we could see inflation in manufactured goods and food. If the Federal Reserve has to raise interest rates to fight inflation, that would cause the economy to slow, and also result in higher interest costs on all that federal debt..
We still are in the midst of a technology bubble. One small piece of evidence: A rumor surfaces that Apple may release an electric car in 2024, and that car will have a better battery than anything currently on the market. This is just a rumor. Apple has not announced anything, and no details are available. And four years is pretty far in the future. But Apple’s stock price jumped nearly 10% in two days. That, folks, is bubble-like behavior. We could drone on with more evidence (Bitcoin anyone?), but you get the point.
So problems lurk out there. Just because the calendar flips from one year to the next, the world won’t suddenly become a place with birds chirping, everyone hugging, and above-average investment returns. But nor will we fall off any sort of cliff — at least not if you have a diversified portfolio; if you own only technology stocks, we won’t rule out that a cliff may be in your future.
This is the time of year when you will hear all sorts of opinions about changes you should make to your investments. Our opinion is that most of those opinions are not helpful. Stick to your long-term plan. As long as we formulated that plan with thoughtful assumptions, the plan will work through good times, bad times, and regular times. And that is the way you will build wealth over time.
Sources: Economist, Wall Street Journal, Value Line, Vanguard, Applied Finance Group