Broker Check

January Newsletter

January 9, 2020


The end of a decade gives us all an opportunity to look back, reflect on how we arrived here, as well as an opportunity to look to the future. We have had a good ride since we started managing client portfolios some twenty-two years ago. Over that twenty-two-year period that I have been managing client investments, ended December 31, 2019, my aggregate managed accounts have grown by 189.78 percent after management fees; with equities returning 312.54 percent and income investments returning 196.36 percent. Resulting in a simple average annual total return, from a combination of principal growth and cash flows from dividends and interest of 8.6 percent.

When asked by new clients, I often point to that long-term return as a reference for looking forward on a long-term basis. Since we are talking about decades, I looked back over the two-decade period just ended and found that my aggregate managed accounts returned 160.11 percent over twenty years, after fees, from a combination of healthy returns from both the equity and income portfolios; for a simple average annual return of eight percent.

Looking back over the last ten-year period, the aggregate managed portfolio managed by both myself and James returned 72.21 percent; for a simple average annual return of 7.2 percent.  Please note that the average annual return for the last ten years has dropped slightly from historical norms; primarily from the global lowering of interest rates by central banks, to the current almost non-existent interest rates on government bonds and notes. As we know, long-term equity risk premium returns start with the lower and “risk-free” rate of government bonds. In the final analysis, the premium for taking equity risk has traditionally been about six percent; accordingly, the ten-year average rate of 7.2 percent is merely six percent from equities and 1.2 percent for the lower returns from bonds.

That’s enough of a history lesson. For the one-year period ended December 31, 2019, our aggregate managed portfolio returned 28.39 percent on equity investments and 13.07 percent on income investments, for a combined, after fee, return of 18.59 percent.

The equity portion of the portfolio reflects our globally diversified approach to asset allocation; with the Domestic portfolio returning 33.57 percent, the International portfolio returning 24.18 percent, the Alternative Equity portfolio returning 29.11 percent, and the Global Equity Allocation returning 25.79 percent.

As previously reported, throughout 2019 we regularly “sold high” from the equity allocations and “put the money in the bank”, in the form of the CD/bond ladder and the alternative income portfolio. The income portion of the portfolio also enjoyed out-sized returns in 2019 from valuation increases on the ladder of fixed rate securities and from the lowering of interest rates driving up the valuations of the alternative income securities (primarily the preferred stock and utility positions).  In the process, the laddered fixed income securities returned 8.45 percent and the alternative income portfolio returned 20.10 percent. Over-all, the net, total return on all portfolios was driven almost equally by unrealized gains in the portfolio AND the combination of cash flows from dividends and interest along with the realized gains from rebalancing portfolios.  At December 31, 2019 the indicated yield on the overall aggregate portfolio is 4.7 percent (please note that as valuations increase the indicated yield from dividends and interest falls).

Where will we go from here? When you review your individual portfolio results, please keep in mind the long-term returns discussed above and that there are three major categories of clients we manage, each with personalized goals and risk tolerances:

  1. Clients under age sixty and still accumulating assets for their future needs and goals can plan (based on the last ten years of returns) on somewhat higher-than-average, long-term annualized returns in the eight to nine percent range (over ten-year periods).
  2. Clients over age sixty that are still accumulating assets for the future can anticipate annualized returns in the eight percent range.
  3. Clients that are now in the distribution phase of their portfolios and are meeting current needs (think retirement, medical expenses, etc.) can anticipate returns in the range of six and one-half percent to seven percent based on returns of that category over the last ten-years.

The above expected outcomes do not mean that the returns for 2020 will hit those targets; as we enter the new year, there are several challenges facing all of us and our portfolios. Although the consensus of most economists is that our economy is not headed into a recession, based on the current health of consumers enjoying lower unemployment and somewhat higher wages. As the “kick” from lower taxes and lower interest rates fades, growth in real valuations can only come from a growth in corporate earnings (which directly drive equity valuations). A recent poll of large corporation CEOs indicates lower growth rates and current reports on manufacturing already reflect this outlook.

Furthermore, the speed bumps created by domestic political differences, geo-political tensions, growing personal and government debt and faltering social security and government medical programs gives all of us pause as we watch the nightly news. All of this leads us to believe that 2020 may be a “more normal” year for the global security markets with reduced returns on client portfolios. The good news is that client portfolios are currently flush with cash and short-term CDs from “selling high” in the last quarter of 2019.

Our intentions are to reinvest and rebalance all portfolios as global markets adjust to the current environment. Many respected market watchers are forecasting a market “correction” sometime in the first half of 2020; and we will be ready to “buy low” when that happens. In the meantime, we are currently under-weighting equities and are keeping cash reserves at higher-than-normal levels. In the process, client portfolios can weather any storm that may arise in the near-term. Note that all clients in, or near, retirement have sufficient balances to meet all planned-for distributions through 2020. When the dust settles, all portfolios will be rebalanced in line with each client’s individual Investment Policy Statement.

Please contact either me or James if you have any questions or need to come in and see us to review your portfolio and your current needs.

With all best wishes for a healthy and prosperous New Year!


Intelligent Investment Management, LLP

Stephen Wheeldon, CFP®