How many of us remember the events 2001 or 2008? Over the ten or so years since 2008, only in 2011 did we see a negative year through fears on the fragility of the global economy. In fact, over the last ten years it has been easy to forget that markets can go down, as well as up.
But it hasn’t always been a smooth ride; in 2015 the third quarter saw significant falls but not enough to deliver a negative year. 2016 seems to be have been saved by Brexit which saw investors benefiting from the fall in sterling on their overseas earnings. This was followed by a stellar year in 2017 and the subsequent events of 2018.
2018 saw falls at the start of the year and in the last quarter. To put this into context, from a high of 2,930 in late September the S&P 500 was down nearly 20% by the 24th December.
There seemed to be much to be afraid about; trade wars, weakening economic data and political uncertainty. In fact, the S&P had just stopped short of a bear market and was on track for its worst December since 1931.
Putting this into context, the financial press had not only been talking about the longest bull market in history only a few months previously, but there had been a natural assumption that a recession was fast approaching. This sudden turn of events over a relatively short period of time made many think the party really had come to an end. It is at these times that investors tend to lose sight of their goals and seek to protect what they have by either reducing equity exposure or disinvesting to cash (crystallising losses).
A lesson in timing in the market
If an investor acted on the back of this then they would have missed a 7% climb in the S&P in the last week of 2018, and a 14% gain in the first quarter of 2019. As I write this blog the S&P is hovering around 2,843. That is around 3% lower than the highs in September.
For those who cut their exposure in December this is a painful reminder of what can happen when we lose sight of our goals. Although we have used the S&P as an example, we can look across all indices and see similar examples.
Once we move to cash then the next question is where we invest. Cash is not a risk-free asset, property especially in the UK is not an easy investment option and if we want to get back into the equity market when do we do it. If markets have rebounded so strongly, have we missed the opportunity to get back some of our losses?
I have no answer to this. In the last blog we demonstrated that coming in and out of the market is a dangerous game. Not only do we lose sight of our goals, but we can often miss the best trading periods. Most people we have met who have done this are no better off and, in many cases, they have suffered losses.
It is also worth adding that when investors sell at a loss, they want to make that up; the higher the loss the more likely they are to make an irrational decision that has the potential to compound it.
Do we ignore the markets?
To some extent the answer is yes because there will always be risks. The risks today are no different to those yesterday; political uncertainty, trade wars etc. But one thing we can endorse is asset allocation / diversification.
Depending on the goal this involves using a portfolio of assets which match the level of risk we are happy with. Traditionally this has been perhaps 60% equities, 40% bonds. We can perhaps include other asset classes as an alternative to bonds but fundamentally what is the right mix? Then we should stay close to that target throughout the cycle. The idea of rebalancing on an annual basis (or more often) is part of that process.
This blog alongside my last blog “What is the best time to invest” should highlight the importance of goals and investing. There will always be risks, the world does not come without them. However, if we decide based on short term movements then we could be caught out. If we focus on what will happen this year or next year then we are likely to lose. But if we focus on the goals and the process, we are likely to win over the long term. Volatility can be uncomfortable but if we focus on the goals, we can ride through it and benefit over the long term.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.