Markets fell in 2018 - but keep this in perspective

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


As CNN reported, markets fell just about everywhere last year. This may have been bad news for short-term investors, but global markets have delivered positive returns in eight out of the ten calendar years since 2009, the bottom of the market during the credit crisis.

In fact, 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, one in three years, on average  delivers 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!)

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 are happy if the value of our investments rises by 10%, and even happier if it then rises by a further 5%. Yet if then falls back the value of the first rise, we are unhappy – even though the same value had made us cheer just a short time previously.

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 meantime, gains and falls 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 in 2019, according to the IMF, which is not that bad. 

Today’s 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. Investing in the stock market for the long term is a game worth playing, at least with part of your portfolio.

As Benjamin Graham – 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"

We could not agree more.

To read more on this subject, download volume 48 of Acuity: Don't panic when markets fall

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