This is the first Strategic Investing article for the year 2020. Will this decade be another iteration of the Roaring 20’s from a century ago, or something completely different?

No one knows.

No one ever knows. And that is why as Strategic Investors we must be ready for anything at all times.

Historical Returns on Various Asset Classes

To illustrate what I mean, here’s a table of certain major asset classes with their total returns for the last few years. Total return includes both price change and cash flow in the form of dividends or interest. For assets where total return is negative, the drop in price during the year more than offset any cash flow, resulting in a net loss.

(Click on image to enlarge)

The Compound Annual Growth Rate (CAGR) is the best reflection of long-term average performance. At the bottom of the above table I have noted the average CAGR for each asset class for the period 1972 through 2019. I’ve also noted the Standard Deviation, which is a measure of how variable returns are from one year to another, for each asset.

SPY, for example, had a CAGR of 10.62% and the Standard Deviation was 17.2%. This means that, based on past performance, about 68% of the time we could expect SPY to range from a 6.58% net loss to a 27.82% gain.

The year 2019 (highlighted above in green) was an extraordinarily good year for all of the major investment asset classes. In 2019, every single asset class except treasury bills performed above its long-term average. So, the only way not to make good money on your investments in 2019 was to try to keep it safe in treasury bills. Stocks, bonds, gold, commodities, real estate – wherever you looked, there was money to be made.

This was, as I said, an extraordinarily good year, and the kind of year not seen very often. We have had other great years in the stock market -2009 and 2013, for example, but in those years, bonds and/or gold had losses for the year.

Some years are the exact opposite of 2019. 2015, for example (highlighted in the chart in yellow), was called The year that nothing worked. All asset classes had negligible to negative returns in that year. Other rotten years included 2008 and 2018 (highlighted n red on the chart).

I make these points to remind us that there is a good reason for the phrase past performance does not necessarily indicate future results. The only thing that is certain about financial markets is that they will change.

Well, there is one other thing that is certain – and that is that predictions will mostly be wrong. Each year there are a number of articles in the financial press comparing the predictions from the leading economists and market analysts at the beginning of the year to actual results. Uniformly, almost everyone will have gotten it wrong.

This known unpredictability – the fact that we know that we don’t know anything – is what must guide our investment strategy.

How?

Strategic Investing principles, as taught in our Strategic Investor course, stress creating a diversified portfolio that is unlikely to be decimated by one terrible market, or even seriously hurt in a nothing worked year.

A strategic investor uses not just a single strategy, but a combination of strategies that allow him or her to take advantage of great years in the stock market, or in bonds, gold, real estate or others, while keeping capital safe and generating cash flow.

In a few words, Strategic Investing principles boil down to these:

1. Identify a target rate of return that fits your circumstances
2. Diversify investments among several different asset classes and strategies, selected individually for your unique combination of needs for safety, growth and cash flow
3. Manage each separate investment according to structured strategy rules that optimize returns while controlling risk