In late 2018, equity markets took a dip and panic set in for investors who had been enjoying years of growth and positive returns. While markets have somewhat bounced back in the first few months of the year, the reality is we may see another market correction in 2019. Before you close up shop as an Investor, put market movements into perspective. John Astrup our resident Investment expert explains market movements in 2018 and tells you what you need to know about becoming a smarter investor in 2019.
In many ways the world of investing is counter intuitive –upside down in fact. An investor’s future is more certain than the present and while we don’t know exactly what equity markets will do tomorrow, history tells us over 15 years they may be up quite considerably.
It is a world where doing less trumps doing more and investors that do nothing, but buy and hold are rewarded. Where the collective is less knowledgeable than any single participant and successful long term investors are those that can stomach the downside.
To understand how to approach investment markets in 2019, let’s give the market movements that we have seen in Q1 2018 and then in Q4 2018 some context.
In 2018, we saw an equity market correction which generated negative media coverage as though we were headed for Armageddon. However is this really the case? What is a market correction and what does it mean for investors? As an industry we define a market correction as a reduction of 10% or more in equity prices, if it’s over 20%, it falls into the bear market territory. Although market events like we have seen at the end of 2018 may have frightened a number of investors, the statistical reality is that market corrections are quite common and have not affected the ability of equity markets to dramatically compound wealth over the long term. Did you know that from 1900 to 2013, US equities experienced 123 corrections – a linear average of one per year.
The effects of an equity market correction or bear market are magnified by our reactions to these events. Our experience shows that if you are able to view these movements as a natural part of investing - you will be positioned to profit while others panic.
The real risk is not portfolio volatility; rather, it is the likelihood that investors will fail to reach their goals.
Often we are investing and saving to achieve a personal outcome, a personal goal - such as funding retirement, paying for school fees, building a deposit for a house. However, it is natural in most human endeavours to set a benchmark against which we gauge performance.
For most investors, keeping score means comparing their returns to those of the equity market benchmark. The problem is most people's de facto benchmark is the S&P 500 or MSCI World, when investors should be focusing on achieving their personal goals rather than focussing on what an arbitrary financial index is doing.
During the global financial crisis when the S&P 500 was down about 40%, those referencing this benchmark were withdrawing money in the billions of US dollars. However for US college accounts and US retirement accounts, plans with a deeply held goal attached to them, premiums continued to be paid. These investors were benchmarking against their personal goals – a personal benchmark.
So what can we expect from investment markets in 2019? Possibly, more fear provoking movements as market correction continues. So what can you do? Stay put and ride it out. Successful investing is hard. Not complicated, just hard. It’s hard because for the most part, we are wired to make the same mistake over and over again. We buy high and sell low because that’s what everyone else is doing. But like any problem that needs to be fixed, the first step is recognising the problem and then coming up with a plan to prevent it.
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