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2020 Annual Client Letter: Investment Principals and Market Observations

Hello and Happy New Year!

Thank you again for taking the time to read my letter.  I hope you find it informative and educational.  I have broken this one up into two parts.  Part one is a recitation of the general principles which govern my philosophy of investment advice.  Part two is a review of the market/economic phenomena of the past year.



  • My overall principal of investment advice is that it is goal-focused and planning-driven, being sharply distinguished from an approach that is market-focused and current-events-driven. Long-term investment success comes from continuously acting on a plan. Investment failure proceeds from continually reacting to current events in the economy and the markets.
  • You and I are long-term investors, working steadily toward the achievement of our most cherished lifetime goals. We make no attempt to forecast, much less time, the market; indeed, we believe these to be fool's errands.
  • Since we accept that the market cannot be consistently timed by us or anyone, we believe that the only way to be sure of capturing the full premium return of equities is to ride out their frequent but ultimately temporary declines.
  • By my count, there have been 15 “bear markets” in equities since the end of World War II—an average of one every five years or so. The average depth of these declines was something on the order of 30%. But in September 1945 the forerunner of the S&P 500-Stock Index was about 161; the Index ended this past year at 3,231. Thus, at least historically, the permanent advance has triumphed over the temporary declines.
  • My essential principles of goal-focused portfolio management remain unchanged. (a) The performance of a portfolio relative to a benchmark is largely irrelevant to long-term financial success. (b) The only benchmark we should care about is the one that indicates whether we are on track to accomplish our financial goals. (c) Risk should be measured as the probability that we won't achieve our goals. (d) Investing should have the exclusive goal of minimizing that risk.



  • Two thousand nineteen was, in important ways, the mirror image of the previous year. Two thousand eighteen was a dramatically outstanding one for the American economy despite which the equity market couldn't get out of its own way and ended on a terrific downbeat. (To wit: a 19.8% peak-to-trough decline through Christmas Eve.) This past year was the exact opposite: an exceptionally good year for the market—up 29%—even though the economy slowed somewhat, manufacturing went into decline, and the earnings of the S&P 500 almost certainly ended 2019 down slightly year-over-year.
  • Without laboring the market's course over the entire year, it was in essence a sequence of three important forays into new high ground. First, it made up all of 2018's fourth quarter drawdown, and broke out at the end of April. It then corrected sharply, about which I'll have more to say in a moment. Another series of new highs followed in June-July and consolidated into the fall. The third and most dramatic breakout took place at the end of October and continued through year-end.
  • These three successive waves of new highs seem to me to have attended upon a slowly growing realization that widespread fears of major disaster were overblown. This was particularly true, I think, with respect to the late October breakout and the virtual melt-up that followed.
  • I'd like to return to the above-mentioned May-June drawdown, which lasted about a month, and took the S&P 500 down about 7%. Technically, this can't even be classified a “correction,” as the Index didn't close anywhere near 10% down. It was, nonetheless, a full-blown panic attack, set off by one of President Trump's most bellicose tweets regarding China.
  • It is the way investors reacted to this relatively brief, relatively shallow drawdown which captured my attention. Simply stated, net liquidations of U.S. equity mutual funds and ETFs—absolutely, and especially contrasted with bond fund inflows—soared to levels not seen since the Great Panic of 2008. I repeat: a one-month, 7% drawdown set off a flight from equities consonant with the existential financial crisis of our time.
  • Indeed, although the figures are incomplete as I write, 2019 almost certainly saw the greatest equity fund/ETF net liquidations on record going back to 1992, according to the data provider Refinitiv/Lipper. This, mind you, after 10-plus years of 16% compound annual returns for the S&P 500. It is difficult for me to regard these data as anything but a powerfully suggestive contrary indicator.
  • Set aside momentarily, if you can, the headline issues of the day: the trade situation, an aging economic expansion, impeachment/election uncertainty, and the like. These are not merely imponderable; they're irrelevant to long-term, goal-focused investors like us.
  • Instead, I would invite you to focus on what seems to be the default setting of the investing public, which I would describe as pessimism verging occasionally into sheer panic. All my reading and all my experience suggest that very meaningful market setbacks have not historically occurred during huge waves of public pessimism and fear. Quite the contrary.
  • This is not to be taken as any sort of market forecast. (As I've always said to you, I'm a planner, not a prognosticator.) It is simply an invitation, as we look into the new year, to take some comfort from the rampant fear abroad in the land, even after a decade and more of stellar returns. There will be plenty of time to begin worrying when the stock market once again becomes cocktail party conversation, and everyone around us is excitedly bullish.
  • Be of good cheer. It is overwhelmingly probable, as financial journalism has been shrieking of late, that 2020 will not match the returns of the past year. Few years ever do; that is both manifestly true, and wholly irrelevant. The fact—or, more properly, the truth—is that we goal-focused, planning driven investors had an exceptional year in 2019. We did so not by forecasting this year's returns—nor by jumping into the market just in time to get them—but by patiently sticking to our long-term equity discipline. That, to me, is the great lesson of this genuinely great year.


Thank you, most sincerely, for being our clients. It is an honor and a pleasure to serve you.


Warm Regards,

David R Henderson



1 Source: “S&P 500 at your fingertips” tab of www.politicalcalculations.com. The data are Nobel laureate Robert Shiller's.

This is being provided for informational purposes only, and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Index returns shown are not reflective of actual performance nor reflect fees and expenses applicable to investing. One cannot invest directly in an index. DCH Wealth Management, nor any of its members are tax accountants or legal attorneys, and do not provide tax or legal advice. For tax or legal advice, you should consult your tax or legal professional. The views expressed are those of DCH Wealth Management and do not necessarily reflect the views of Mutual Advisors, LLC or any of its affiliates. 

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