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| Pathways Advisory Group, Inc. Evon Mendrin, CFP® |
In the blink of an eye, we’re already three months into 2019! Before we go too far into the year, we’d like to take one last peek at 2018. The year was full to the brim of drama – politics, the Fed Reserve, Inflation, Brexit, Kardashians, and plenty more. It was quite the year. With the help of Dimensional Fund Advisor’s 2018 Market Review, let’s look back at a couple of the takeaways.
1) Market Declines Don’t Always Spell Doom and Gloom
Market declines can be scary. It’s scary to see your
investments decline in value – especially by a lot! It’s human nature to be, at
the very least, uncomfortable. 2018 ended in a bang - and I don't mean the New Year's fireworks. As we see in the chart to the left, Major World Indices, 4th
quarter of 2018 saw major declines across US and International stocks.
Most saw double digit declines. That seems scary. However,
large declines like these don’t always spell doom and gloom. In fact, stocks
across the globe tend to do very well after the scary dips!
Stock market declines
of 10% have occurred numerous times in the past. After declines of 10% or more,
equity returns over the subsequent 12 months have been positive 71% of the time
in US markets and 72% of the time in other developed markets.1 The
chart below shows the historical performance of markets subsequent to declines
of 10%, 20%, and 30%.
Large Cap stocks across the world have historically shown
major positive performance through 12-months after deep declines of 10%, 20%,
30%. This is especially helpful if you are buying stocks at these times (contributing to your accounts). As prices
go down on businesses around the world, the expected return on your investment
goes up. Your favorite companies are on a temporary discount!
Can we guarantee this will happen? Of course not.
Historically, 28-29% of the time we saw a continued decline (2008, anyone?). The
markets will do what the markets will do. However, the odds are good that there’s
light at the end of the tunnel. Keep in mind this is only 12-months after, not
taking into account the longer-term track record of 5-, 10-, 20-, and 30-year
periods. Quite the fascinating phenomenon!
Fortunately, we’ve seen this happen in 2019. Year-to-date
(as of 2/27), the S&P 500 is up over 11% and the MSCI All Country World
Index up over 10%. It just takes grit,
willpower, and a long-term belief in the long-term markets to stick with your
investments through each decline.
2) Diversification Continues to (and always will be) Important
While markets around the world generally had negative
returns in the fourth quarter, the dispersion in their returns highlights the
importance of global diversification. When looking at individual countries, 46
out of 47 countries were down for the year.
Using the MSCI All Country World Index (IMI) as a proxy, no
countries posted positive returns among developed markets, and only Qatar
managed a positive return among emerging markets. As is typically the case,
country‑level returns varied significantly. In developed markets, returns
ranged from −24.1% in Belgium to 0.0% in New Zealand. In emerging markets,
returns ranged from −41.3% in Turkey to 27.1% in Qatar—a spread of almost 70%!
Large dispersion among country returns is common. It’s nearly
impossible to predict which counties will outperform the others in any given
year. Without a reliable way to predict which will deliver the highest returns,
this large dispersion in returns between the best and worst performing
countries again emphasizes the importance of maintaining a diversified approach
when investing globally. Aim to capture the long-term return of the global economy
without trying to guess which country does best.
Conclusion
2018 included numerous examples of the difficulty of predicting the performance of markets, the importance of diversification, and the need to maintain discipline if we as investors want to effectively pursue the long-term returns of the businesses of the world.It’s not always pleasant and sometimes downright terrifying. However, history shows us that – through Great Depression, Great Recession, World Wars, military conflicts, oil panics, and so on – stock markets reward long-term, patient, discipline investors that stay the course.
1. Declines are defined as points in time, measured monthly, when the market’s return since the prior market maximum has declined by at least 10%. Declines after December 2017 are not included, but subsequent 12-month returns can include 2018 returns. Compound returns are computed for the 12 months after each decline observed and averaged across all declines for the cutoff. US markets (1926–2018) are represented by the S&P 500 and Developed ex US markets (1970–2018) are represented by the MSCI World ex USA Index.
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