Markets fell in 2018 – but keep this in perspective…

You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets. Peter Lynch – one of the few great stock pickers during his time at Fidelity

2018 may have been a disappointing year for equities, but it shouldn’t have been a surprise

Christmas eve delivered a present that most investors were not hoping for – the biggest fall on that specific day in history (at least in the US) of -2.7%. That capped a fall in global markets of around -4% for the year. That is hardly an investing disaster, especially as high-quality bonds held their own, as did global property. It probably felt a lot worse a) because of the relentless negative news coverage of things like the risk of a US-China trade war and the knots that Parliament has tied itself in over Brexit and b) because the peak-to-trough fall was considerably more than this at around -11%. From some of the newspaper headlines, one might think that we were experiencing calamitous times in the equity markets:

‘Global stock markets suffer worst losing streak for five years’. The Guardian (26th October 2018)

Or:

‘Stock market slide in 2018 leaves investors bruised and wary’ The Financial Times (31st December 2018)

Take a look at the chart below. Looked at in isolation, one could easily get sucked into this kind of rhetoric that is aimed at selling newspapers (or these days, attracting clicks).

Yet we need to keep a perspective on this.

First, over the 10 years 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.

over that period, in every single year, investors have suffered a fall from a previous market high and many of these were larger than 10%

Second, over that period, in every single year, investors have suffered a fall from a previous market high and many of these were larger than 10%. However, even being invested from the start of 2008 and suffering the 35% peak-to-trough fall in 2008, an equity investor over that 11-year period would have turned £100 into £230, i.e. 8% compounded over 11 years, if they had been disciplined and patient (two areas of human weakness!). It’s at those times good advisers really come into their own, refusing to panic and rebalancing portfolios if needs be, buying equities when they are down – something that most investors won’t find easy emotionally, even though logic dictates that it makes good sense.

Finally, 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. The figure below makes this point.

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.

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. Today market prices reflect the aggregate view of all investors based on the information to hand. If new information comes out 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 a legendary investor in the early 20th Century once said:

“In the short run, the market is a voting machine but in the long run it is a weighing machine” Benjamin Graham

We could not agree more.

Jonathan

About the Author

Jon is a highly qualified and experienced Chartered Financial Planner and Certified Financial Planner with over 27 years’ experience. He loves working with clients who are passionate about getting the most out of life and feels his job is to support them living life to the fullest. Read more from Jonathan...
This article is distributed for educational purposes and should not be considered investment advice or an offer of any product for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. Past performance is not indicative of future results and no representation is made that the stated results will be replicated.
Terrific meeting, many thanks. We always drive back from meetings with you wishing we'd met you and Dom years ago - but at least we're with you now! RB

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