The Planner's Perspective: How Do You Handle Years Like 2018?

Paul Morrone |

By Paul Morrone CFP®, CPA/PFS, MSA

Financial markets and the worldwide economy are incredibly resilient and have continually overcome the unthinkable. A short decade ago, we were in the midst of one of the darkest economic times short of the great depression in the 1920s. March 9th of 2019 will mark 10 years since US Equity Markets hit rock bottom. If anything has been proven during this time, it is that patience and discipline can lead to significant rewards. This past year has been the first stumbling block in nearly a decade, sparked by a myriad of concerns ranging from domestic political disputes, to geopolitical tension, to trade, to interest rates and to global economic conditions. While these are all valid concerns with a justified impact on equity prices, some historical perspective may shed some light on where we’ve been.

US equities (as measured by the S&P 500) have had 9 consecutive years of positive returns, starting with the 2009 calendar year and going through the end of a red-hot 2017. During this 9-year period, we have seen double digit returns in all but two years (2011 and 2015). Volatility has been largely nonexistent, and when it has been, prices have rebounded very quickly; allowing the short-term pain to quickly dissipate. While success here in the US has far outpaced international markets (both developed and emerging), there has been significant global growth as well. The philosophical concept of two steps forward, one step back hasn’t come into play in nearly a decade, until now.

Some years are winners and others are losers. And while 2018 is a loser, history shows that, on average, there are 7 positive years and 3 negative years during a 10-year stretch. In fact, in the last 30 years (since 1988) there have only been 5 calendar years where the S&P 500 has had a negative return (significantly less than the historical average). Said differently, from 1988 until now 83% of calendar years have yielded positive returns while only 17% have ended in the red. Of course, this only looks at calendar year returns over a 30-year period and doesn’t highlight the many intra-year price changes of 20% or more. However, those are largely irrelevant as the point-to-point return numbers are more consistent with what a long-term investor would experience.

This is also not to say that those down years don’t hurt, and sometimes they hurt a lot. While the financial crisis (2007-2009) was about 18 months long and saw peak to trough price drops of 52%, few investors remember the positive returns generated in 2007 and 2009 at, +5.49% and +26.46%, respectively (the 2008 calendar year was a -37% return). My point being that capturing the positive performance in these years was critical to making up for lost ground. Many investors who sold out during the period of price declines were reluctant to get back into equities in 2009, thinking that it could still get worse. Those folks lost out on one of the best recovery years during this latest bull run (only 2013 was better), which was essential in making up for substantial losses suffered during the downturn.

History has shown that capturing all of the market’s potential upside is far more important than avoiding the downside for an investor who is willing to accept the inherent risk of equity investing. This is largely because there is not a reliable predictor of future prices (meaning there is no way to know exactly when to get out and exactly when to get back in). A well-crafted financial plan should take into account the potential volatility of your portfolio and the drawdown effect that it can have during rough times. For some, this may be merely an uncomfortable time to be an investor, for others it may mean making material changes to their spending/savings plan or goals. Without a clear understanding of where you stand and how portfolio fluctuations are going to affect you both in the short and long term, it is easy to see how so many let their emotions get the best of them and sell at the absolute worst time.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index which cannot be invested into directly.  Past performance is no guarantee of future results.

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