by Brian DeChesare Comments (6)

The Financial Markets in 2019: What Happened, How I Changed My Portfolio, and My Predictions for the 2020s

2020 Financial Market Outlook

Let’s start with the headline: I was very, very wrong about the markets in 2019 in my outlook published in January.

In fairness, I also predicted that I would be wrong, and I got the actual percentage increase in the S&P 500 almost exactly correct:

“And feel free to laugh at my ultra-bearish views, especially if the market is up 30% this year.”

Almost every financial asset was up significantly in 2019, in a complete reversal of 2018.

I can sum up why this happened in two words: central banks.

In 2018 and early 2019, the Fed seemed to be moving toward “quantitative tightening” by reducing its Balance Sheet and raising interest rates.

But then they reversed course, cut rates three times, and also re-started quantitative easing by intervening in the repo market.

Meanwhile, the European Central Bank also cut rates and restarted QE, Japan still has low/negative rates, and the Peoples’ Bank of China lowered reserve requirements for Chinese banks.

In short, 2019 provided a flood of easy money from central banks worldwide, and that money flowed directly into the markets:

What Happened, In Chart Form

If you want to see how quick this reversal was, take a look at the Fed’s Balance Sheet over the past year, from December 25, 2018 to December 25, 2019.

They reversed more than half of the “tightening” in a matter of months.

This 10-year chart says it all:

I also like this chart from Yardeni Research that shows the S&P 500 vs. the total assets of the major central banks:

2019 Financial Markets Review - 01

Against this backdrop, economic fundamentals were questionable or negative:

  • Earnings from S&P 500 companies fell, and so did earnings forecasts.
  • Global growth was still “sluggish,” and nothing changed the 2-3% growth-rate range the U.S. has been in since the financial crisis.
  • “Trade tensions” have not been resolved at all (ignore the tweets).
  • And emerging markets like China have struggled, with the lowest factory output in a decade or two and falling exports.

Broadly speaking, this sums up what has happened worldwide since 2008: massive monetary stimulus, little-to-no benefit for the real economy, and rising wealth and income inequality.

It also explains seeming paradoxes, such as the fact that Germany is in a borderline recession… while the Berlin housing market is in a bubble.

And don’t even get me started on negative interest rates and negative yields.

In short, the financial markets are even more distorted going into 2020, and I don’t think this “experiment” will end well.

How I Changed My Portfolio in 2019

When it became clear that central banks were going to drop interest rates and flood the market with easy money, I changed my strategies.

Last year around this time, I had the following allocation across all accounts:

  • Cash & Savings: 40%
  • U.S. Treasuries: 12%
  • Real Estate – Senior Secured Loans: 12%
  • Equities: 10%
  • Angel Investments: 8%
  • Gold: 0%
  • Municipal Bonds: 5%
  • Real Estate – Equity in Individual Properties: 5%
  • Miscellaneous (Risk Parity Fund): 3%
  • Crypto (Bitcoin, Ethereum, Others): 2%
  • “Investment Grade” Corporate Bonds: 2%

I shifted out of Cash, Savings, and U.S. Treasuries and into Equities over the year, just like the central bankers wanted.

My current allocation looks more like this:

  • Cash & Savings: 26%
  • U.S. Treasuries: 6%
  • Real Estate – Senior Secured Loans: 10%
  • Equities: 27%
  • Angel Investments: 6%
  • Gold: 4%
  • Municipal Bonds: 6%
  • Real Estate – Equity in Individual Properties: 6%
  • Miscellaneous (Risk Parity Fund): 4%
  • Crypto (Bitcoin, Ethereum, Others): 4%
  • “Investment Grade” Corporate Bonds: 0%

Overall, I still have too much in Cash & Savings and Real Estate (both debt and equity).

My plan for 2020 is to shift more of those into Equities and Gold (as a hedge).

The U.S. stock market is incredibly expensive currently, so I’m underweighting the S&P and focusing on cheaper indices.

For example, the Russell 2000 Value index currently has a P/E of 14x vs. 23x for the S&P.

And emerging markets and many developed, non-U.S. markets are also much cheaper.

I’ll comment on the asset classes that have changed the most below:

Cash & Savings

Similar to Warren Buffett, I’m still sitting on a lot of cash, waiting for more of a major market correction (50%+).

When interest rates in the U.S. were still 2-3%, that wasn’t the end of the world because I was still earning above the rate of inflation.

But now that inflation has edged higher and rates on savings accounts have fallen, it does not make sense to have this much in cash.

I’m planning to reduce this balance to 10-15% of my total assets this year.

U.S. Treasuries

For a “risk-free” asset, long-term U.S. Treasuries delivered an amazing performance in 2019, up ~14% total.

As expected, short-term Treasuries were up much less (~4%) due to lower interest-rate sensitivities, but 4% still beat rates on savings accounts.

There’s a chance the Fed could move to zero or negative rates, especially if there’s a recession, so I’m still maintaining 6% of my assets here.

But I cut my percentage in half because it’s equally likely that yields will move higher, or that inflation will pick up, both of which would be bad for existing bond holdings.


Yes, U.S. Equities are currently extremely expensive, and I’ve thought the market has been overpriced for the past 5-6 years.

The Shiller P / E on the S&P 500 is currently over 30x vs. a historical median of 16x, and virtually every other metric (Market Cap / GDP, normal P / E, Price / Sales, etc.) is at or near all-time highs as well.

So, I’m taking the following steps here:

  1. Allocating money to U.S. Equities in sectors that are comparatively cheap, such as small-cap value stocks.
  2. Maintaining a modest percentage in a “Total Market” fund or index because anything could happen. Sky-high valuations didn’t prevent a record performance in 2019!
  3. Overweighting Equities in other regions, such as non-U.S. developed markets and emerging markets.

On the last point, take a look at Star Capital’s Cyclically Adjusted P / E (CAPE) ratio by region:

2019 Financial Markets Review - 02

The U.S. is clearly the most overpriced major market, while places like Russia, China, South Korea, and Latin America are 2-4x cheaper.

Even parts of Western Europe, such as the U.K., Germany, and Spain, are far more reasonable.

So, rather than avoiding Equities altogether, I am shifting to cheaper markets that have underperformed over the past decade.


I am not a “gold bug,” nor do I think that the world is going to end in a zombie apocalypse.

Instead, I increased my Gold allocation and plan to increase it even more because:

  • Gold is relatively uncorrelated with stocks, bonds, and most other financial assets, so it provides a nice hedge if the markets tank.
  • As central banks keep flooding the markets with cheap money, Gold will be the chief beneficiary.
  • Gold will always stay ahead of inflation over the long term – and we could easily see much higher inflation in the future.
  • With bond yields low or negative, it might be tough for corporate and government bonds to provide their traditional “safety” roles in portfolios.

I eventually expect to hold 10-15%, possibly up to 20%, in physical Gold.

Other Portfolio Ideas: Golden Butterflies and More

Last year, I received some questions about how I manage all these accounts.

The reality is that it’s complicated and cumbersome, and I recommend keeping things much simpler.

For each account – Vanguard, Wealthfront, Fidelity, etc. – I usually pick one strategy or asset allocation, contribute a fixed amount each month, and rebalance periodically.

As an example, here’s my current allocation in non-retirement accounts on Vanguard:

  • Total Stock Market Index: 20% [VTSAX]
  • Small-Cap Value Index: 20% [VSIAX]
  • Short-Term U.S. Treasuries: 20% [VFIRX]
  • Long-Term U.S. Treasuries: 20% [VUSUX]
  • Physical Gold Trust: 20% [PHYS]

This one is a variation on Ray Dalio’s “All Weather” portfolio called the “Golden Butterfly,” and you can read all about it online.

Over the past ten years, average annualized returns have been ~8%, and since 1977, they’ve been ~10%.

Yes, those are lower than S&P 500 returns, but the risk/volatility and maximum drawdown are also much lower.

The idea is that each component performs well under different economic/market conditions: Gold does well under rising inflation, Equities do well under rising growth, Bonds do well with slowing inflation, etc.

I would not recommend this portfolio if you’re 25 and plan to work for another 40 years.

It’s definitely on the “lower risk, lower returns” side of the spectrum, and it makes more sense if you’re older or your main goal is capital preservation with modest growth.

If the S&P 500 were closer to its historical valuation levels, I would change this allocation and move out of U.S. Treasuries.

I might do something like a 1/3 split between U.S. Equities, Non-U.S. Developed-Market Equities, and Emerging-Market Equities, with 5-10% allocated to Gold.

So, What Will Happen in 2020 and Beyond?

The short answer is, “I have no idea, and I no longer try to make macro predictions.”

I have a very good track record with stock pitches for individual companies, such as AvalonBay, Ultra Petroleum, and Shawbrook, but my macro track record is poor.

The perma-bears are predicting major currency devaluations and hyperinflation, along with a market crash, as central banks lose their ability to control the markets.

Meanwhile, the perma-bulls think that the party will continue forever, as interest rates edge even lower, economic growth picks up, and central banks keep printing infinite money.

The one constant is that everyone seems to think that central bank Balance Sheets will keep expanding forever.

That could result in financial asset inflation, as we saw in the 2010s, or it could spill over to the real economy as well.

To handle both those possibilities, I moved into Equities and Gold.

And instead of timing the market or attempting to predict specific outcomes, I overweight cheaper sectors/regions and underweight more expensive ones.

I’ll stick to that approach even if central banks implode, or the party finally ends and there’s an actual bear market.

Coming Up Next Week: My top investing mistakes over the past ten years, from stocks and bonds to real estate, peer-to-peer lending, and Bitcoin.

M&I - Brian

About the Author

Brian DeChesare is the Founder of Mergers & Inquisitions and Breaking Into Wall Street. In his spare time, he enjoys memorizing obscure Excel functions, editing resumes, obsessing over TV shows, traveling like a drug dealer, and defeating Sauron.

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  1. Brian, why PHYS, not GLD?

    1. I actually own both in separate accounts, but I like PHYS because it lets you redeem your shares for physical metals held in a vault. GLD does not let you redeem for physical gold.

      So, if there is an actual currency collapse or even just a big devaluation, PHYS is safer.

      1. If (when?) we have a major currency crisis, assuming you can even get access to the physical gold, will it still have any value?

        Have you read the “Doomsday Prep for the Super Rich” article in the New Yorker? It’s a couple years old now but still very interesting.

        Michael Burry has gone on record about a bubble in the S&P 500, and given his track record I think that is very ominous.

        Gary Shilling thinks we’re already in a recession, and says investors should short the S&P.

        Interesting times…

        1. Maybe, maybe not, but gold is more likely to retain value than fiat currencies in the case of a major currency crisis or devaluation. Besides, how else are you going to preserve money? Bitcoin? Rare art? If it’s the end of the world, everything is worthless anyway.

          Wealthy people have a preoccupation with predicting the apocalypse because they don’t want to lose everything. I don’t think about it because there’s literally nothing I can do to shift the odds either way.

          Almost everyone thinks the S&P 500 is overpriced and has been for years, but that doesn’t necessarily mean it will crash. It could just mean poor returns as prices stay in place while earnings grow, resulting in multiple contraction.

          And it’s not a good reason to avoid investing altogether – just go to the cheapest markets that have under-performed the most over the past decade. The one constant is that there will always be inflation in a fiat system, so you need to stay ahead of it somehow.

          1. Thanks for following up Brian.

            Much has changed since my first comment (i.e. possible U.S./Iran war), and it looks like you might be well rewarded (or at least well protected) by that gold you own…

            Any thoughts on the “best” area of finance to begin a career in today?

            I have a standing offer for a job in venture… it’s in Israel though. Do you know anything about VC in EMEA? I did not see any articles on the site…


          2. I think IB, PE, and VC will continue as strong areas because they’re all relationship/deal-based and are difficult to automate. Yes, maybe some parts of the process can be automated, but the last time that happened (spreadsheets), it actually increased demand and headcount in those industries.

            I don’t know anything about VC in the EMEA region, unfortunately. It’s definitely much smaller than the U.S. or China markets, but there have been plenty of successful companies out of Israel and other places. Hard to say whether or not you should accept the offer without more context, but if you’ve been aiming for these roles for a long time and this is the best one you’ve found or won, you should probably take it.

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