“Boring” is certainly not the word most people would use to describe 2020. In fact, it’s been anything but boring, what with the pandemic, economic uncertainty, passionate political climate, and wildfires and hurricanes thrown in for good measure. However, the stock market has been boring if you didn’t look often. If you looked at your investments on January 1st and then again on September 30th, you’d see very little change. However, if you checked it more often, you may have felt depressed or euphoric, depending on when you looked.
Why do we check so often? We do it because the information is available to us in real time, but that doesn’t mean the information is relevant. For instance, if you were planning a trip a year from now, looking at the weather every hour today wouldn’t be helpful. Similarly, it doesn’t help to look at your investments every day or every week when you don’t need the money for 5+ years.
We’ve had very volatile quarters, but in sum total the three quarters were boring! The third quarter was very similar to the second quarter of the year. January through March was probably one of the worst investment periods in history, and then we had one of the best six-month periods in decades. You shouldn’t have made long term decisions about your money early in the year, and you shouldn’t be doing it now, either.
One common question we are getting (and rightly so) is about whether the market is overvalued. Well, that all depends on what part of the market you are looking at. As I’ve written about many times recently, Does The Market Make Sense, the US market in particular has been carried forward by a handful of tech stocks that are incredibly expensive relative to their non-tech peers. This trend has been going on for a few years; it’s nothing new. We saw the same thing back in the late 90s and early 2000s. This divergence in the market has created one of the largest valuation differences between value and growth investing in decades. As the chart below clearly shows, we saw this problem in the late 90s, and it was followed by dismal growth-stock returns and great value-stock returns. An investment philosophy should not only be one or the other, but rather both, so we can take advantage of whichever flavor is in vogue at the time. That’s what diversification is about.
However, the evidence is clear: value investing, over time, does get better results than growth. The chart below shows the variability of returns between value and growth. You can see that sometimes growth (think tech stocks) beats value stocks (think low-priced stocks like healthcare, manufacturing, etc.) and vice versa; however, even including the past few years, value has outperformed by 4.5% per year.
Well then, what do we do? We stick with a diversified portfolio that includes both growth (at a reasonable price) and value stocks as well.
As always, we appreciate your trust. Remember, the only bad question is the one that isn’t asked. Stay safe!