Markets fell in 2018 – but keep this in perspective
2018 may have been a disappointing year for equities, but this shouldn’t have been a surprise.
December 2018 dished up a rather distasteful present for the holiday period. Many lines were written in the broadsheets about the global equity market falls, but were they really anything out of the ordinary?
“Stock market slide in 2018 leaves investors bruised and wary” The Financial Times (31st December 2018)
Since 2009 (the bottom of the market during the Credit Crisis) global markets have delivered positive returns in eight out of the ten calendar years. The last negative year for equities was back in 2011, when the markets were down around 7%. Over the history we have available to us – on average – one in three years deliver negative returns. Investors have, of late, been extremely lucky.
Since 2008, in every single year, investors have suffered a fall from a previous market high and many of these falls were larger than 10%. However, even investing at the start of 2008 and suffering the 35% peak-to-trough fall in 2008, an equity investor would have turned £100 into £230, i.e. 8% compounded over 11 years, if they had been disciplined and patient (two known areas of human weakness that we try to ensure our clients do not succumb to!).
As humans, we tend to have a strange view of what invested wealth represents and how we feel about it at any point in time. We tend to be happy as wealth – at least on paper – goes up to some value at a specific point in time and unhappy when we reach that value again, if it is achieved after a market correction.
Remember, the true meaning of wealth is having the appropriate level of assets that you require, when you require them, to meet your financial and lifestyle goals. In the interim, movements in value are noise, somewhat meaningless and part and parcel of investing. When you invest in equities, you should try to avoid mentally banking the money you (appear to) make on the undulating, and sometimes precipitous, road you are on. Remember too that the headline equity market numbers are unlikely to be your portfolio outcome, as most investors own some sort of a balance between bonds and equities.
Keeping things in perspective
Investing in equities is always going to be a game of two steps forward and one step back. What equities deliver from one year to another is of little consequence to the long-term investor, who does not need all of their money back today.
It’s worth remembering that equities are only one component of a diversified portfolio and if you’re reading this article having invested using one of our less aggressive portfolios, your equity allocation will be reduced, in turn reducing the impact of the equity market falls described above.
As far as 2019 is concerned, no one who is honest knows what will happen in the markets. The global economy is still set to grow by 3.5% above inflation this year, according to the IMF, which is not that bad. Todays’ market prices reflect the aggregate view of all investors based on the information to hand. If new information is released tomorrow, prices will adjust to reflect the impact this has on company valuations. As the release of new information is – by definition – random, so too must price movements be random, at least in the short-term. Over the longer-term they reflect the real growth in earnings that companies deliver through their hard work, executing the delivery of their business strategies. In the longer-term, investing in the stock market is a game worth playing, at least with part of your portfolio.
As Benjamin Graham – a legendary investor in the early 20thCentury once said:
“In the short run, the market is a voting machine but in the long run it is a weighing machine”
We could not agree more.
Notes and Risk Warnings
Use of FE Analytics Data
© FE Analytics 2019. All rights reserved. The information contained herein is proprietary to FE Analytics and/or its content providers. Past financial performance is no guarantee of future results.
This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation. This article contains the opinions of the author but not necessarily the Firm. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. Errors and omissions excepted.