A belated Happy New Year to all! Our apologies for a delayed Market Update to start 2020. With the barrage of events so far this year we’ve had to re-write more than once or twice. As a brief reminder, we were looking at the US attacking Iran, wildfires in Australia, an impeachment trial in the US and most recently, the outbreak of Coronavirus in China, just to name a few. What happened in January alone would be enough for a year!
Given that so much has happened – none of which could have reasonably been expected, I will not be making any forecasts. Instead, let’s look at what happened last year and discuss what our focus is and always has been.
For investors, 2019 was the year where “everything worked”. Stocks and bonds, both in Canada and abroad, produced excellent returns. This was in stark contrast to a difficult 2018 when over 90% of global asset classes experienced declines.
It would be easy to say, “What a difference a year makes”. However, we would argue that calendar years are not meaningful to long-term investors. A single year of returns does not significantly impact long-term financial plans for our clients. Financial markets are not sports teams whose seasons end after the final buzzer and begin again the following season with a new roster. We must view any returns in the market or portfolios as a means to achieve your goals.
Nonetheless, typical investors focus on these short time periods because they satisfy the behavioural need to group data in clean buckets. And it makes for good stories – “best this”, or “greatest that”. For example, much has been written about the stellar +31.5% return of US Large Cap Equities (S&P 500 Index) in 2019, but only 22.4% for investors living and eating in Canadian Dollars. Still, it was the second-highest return in 23 years, only slightly behind 2013’s return of +32%. But if you go back just three more months, US Large Cap Equities have returned only +10.5% since October 2018. Not quite a headline grabber anymore.
History tells us that it is not uncommon for one asset class to outperform another for many years but returns invariably return to the mean – there is no free lunch. Just look back to the 2000s, or the “lost decade” for US Equities. US Large-Cap Equities returned -1% compounded annually while enduring two brutal bear markets and dramatically under-performing all other major asset classes.
To mitigate uncertainty such as this, we diversify portfolios across many different asset classes and countries. A diversified investor will never have the “best” performing portfolio or even the hottest market sectors. By definition, being diversified means that some investments perform worse than others. That is a good thing because it also means that a diversified investor will never have all their money invested in the worst-performing investment.
We continue to adhere to our core investment principles of thinking long-term, preserving your capital through personalized risk management and maintaining a disciplined process through diversification.
Vice-President, Portfolio Manager