COVID-19 vaccine prospects should make 2021 a year of Global Economic Recovery.

As I sit here in my home office in early January, thinking about topics to add to this 2020 review and quarterly letter, my monitor is a constant reminder of how our world has changed, as I would normally be writing this letter from my office in Pasadena. My son Rowdy was born in August 2018, and of this moment, has spent more than 1/3 of his life living in a COVID-19 world. Our world has changed, acceptance is the first step.

Looking back on 2020, I think I will take away lessons of flexibility and the pitfalls of assumptions. If you have read my letters, you will know that I believe we entered a more risk-based market environment in October 2018, and 2020 was right in line considering the massive volatility in the early part of the year with historic market declines rivaling the largest in history. And although the COVID-19 pandemic was just hitting its stride in early summer, markets quickly corrected and ended the year positive with the S&P 500 over 16%, Nasdaq over 43%, and DJIA over 7%.

This is not to say there is no growth to be seen in the markets. If 2020 has taught us anything, it is that there is always a sunny side of the street. In fact, the “new normal” looks a lot like the old normal, where currently, six of the eight economic indicators tracked by Russell Investment’s Market Indicator worksheet fall somewhere in the “typical” range.

See Russell Investment Market Indicator Worksheet Here.

So, where do we go from here? If you are a golfer, how do you follow up a hole where you made Birdie? If you are in entertainment, how important is your next role after winning a major award?

To say I am optimistic is generally correct as I believe the United States has a firm grasp on the economic levers needed to get us through this time. Recently, I have grown even more optimistic when I see cyclical natured stocks outperforming the growth driven names we have come to see on CNBC: Amazon, Apple, Google, Facebook, Microsoft. I call it the big 5. This shows me that much of the world is not on autopilot and that people are re-balancing their portfolios as they should.

However, I am concerned about the following, as I am wired to be:

  1. Retirement in 2021.
  2. While there is very little we control regarding the over investment markets, we CAN control the amount of risk we put out there. I saw several times where people sold out of their investments when the market went down, only to maintain those losses when the markets recovered.

    In retirement, one of the most important pieces of information is the investment returns in the first year of retirement. This is called the “Sequence of Return” risk, also “Vintage Year” risk. If the market draws down as it did in 2020, and you either continue to take income from the portfolio or emotionally sell your investments, it can have extreme consequences on your retirement. Retirees HAVE TO plan on these types of events in the early years of retirement and have a safety net to go to for income when their investments are not performing well.

  3. Over-Allocation to the Big 5
  4. I have addressed this in previous letters, but it continues to be true. Index funds and non-active ETF’s have risen in popularity because of their low costs and transparency. However, some of the investments may track the top holdings too closely, negating the diversification factor in those funds. Now that Tesla has been added to the index, it is even more top weighted.

  5. Insurance
  6. One of the biggest mistakes I see every day is that wealthy people do not carry enough insurance. The thought is, “I have plenty of money. I do not need my kids to be spoiled rotten.” I get that. I really do. However, there are three very good reasons why those same wealthy individuals should rethink their logic.

    • Insurance is not getting any cheaper. Low rates and increased death benefits paid out may lead to further rising insurance costs.

    • Estate Exemption is only going down. The current generous estate tax exemption ($11.7 million for an individual; $23.4 million married couple) is set to sunset on January 1, 2026, and reset back to it’s lower (approx. 5mm) amount. So, let’s assume your estate tax exemption goes down and the tax on your estate goes up, that is less and less to your beneficiaries. While you may have a legacy now, will you in 20 years?

    • SECURE Act: no more Stretch IRAs. The rules have changed. If you leave a beneficiary an inherited IRA, they have 10 years total to withdrawal all the funds. This is a massive hit to multi-generational income planning.

    While the world deals with the fallout from COVID-19, there are some bright spots.

    1. The band plays on. The world did not fall into the ocean after March 2020. Our financial levers saved us again. Markets rebounded to historic highs and seem to have investors optimistic about our future.
    2. Vaccines are on the way. That we, as a world, were able to mobilize and combine forces to produce in 10 months what it took previous generations years to do is inspiring.
    3. Low inflation and an appropriate responsive Federal reserve. The US Fed recently announced they will allow inflation to rise above 2% (target) before rising interest rates.
    4. SPACs and IPOS. 2020 saw a resurgence of primary market offerings and brought back the use of Special Purpose Acquisition Companies (SPACs), a tool not used with regularity since 2007. Robust primary markets are a sign that there is demand for investment, and an active M&A schedule is usually a sign of a growing economy.


    While 2020 continues to be scary both personally (especially if you are required to teach your middle schooler common core) and professionally, as the chess pieces continue to move, the optimism from the 2nd half has spilled into 2021. While many portfolios and plans did very well, it is more important than ever to stay unemotional and committed to a sound financial plan.

    Last Items:

    1. Get your estate plan in order now
    2. Consider using those appreciated assets to give to your favorite charities instead of cash
    3. Maintain at least six months of reserves, especially if you are in the early years of retirement
    4. Consider life insurance, call me with questions

    As always, my door is open for questions or concerns. If you know someone who could use our help, please reach out and set an introductory video chat.

    Philip Clark, CFP® | Director – Wealth Management
    Direct: 626.788.3947

    This information should not be construed as tax advice, nor should be taken as financial planning advice. Please consult your tax professional.

    These opinions are based on observations and research and are not intended to predict or depict performance of any investment. These views are as of the close of business on 01/21/2021 and are subject to change based on subsequent developments. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. These views should not be construed as a recommendation to buy or sell any securities. Past performance does not guarantee future results


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