2019 was an all-around great year for investors in both stocks and bonds. Despite concerns over Brexit, the Fed’s stance on interest rates, or trade deals with China, most major stock segments were up over 20%. Bonds also posted strong returns in the 7-8% range.
This all comes after a rough 2018 when US stocks had their worst year since 2008 and many headlines were prompting further concerns. It illustrates how dangerous is can be to simply look at specific periods in the past and extrapolate those returns into future expectations.
Another way to look at this is to consider the differences between the past two decades (2000s and 2010s). In the 2000s, the US market was nearly flat while internationals were strong. In the 2010s, we saw the opposite.
I think these two examples from recent time periods serve as a good reminder that the stock markets are very unpredictable. We may think that recent trends are the new normal only for the market to completely turn around. That is why we advocate the following principles:
- Don’t try to time the market. Getting out of the market based on fear can be detrimental to long term performance. It also requires the investor to make two accurate predictions: when to get out of the market and when to get back in.
- Diversification remains very important. Right now, the US Markets might feel the safest because of recent performance and it may make diversification feel unnecessary. But it can also be argued that the US stock market is the most overvalued therefore riskier.
We can always count on uncertainty to persist. What will be the fate of Brexit, conflicts with Iran, or the 2020 presidential race? These are just some of the known issues at the moment, but what else might impact markets in 2020 and beyond?