2018 may have been a disappointing year for equities / shares, but it shouldn’t have been a surprise.
‘Stock market slide in 2018 leaves investors bruised and wary’ The Financial Times (31st December 2018)
Since 2009 (the bottom of the market during the Credit Crisis), global markets have delivered positive returns in eight out of the ten calendar years. The last negative year for equities was in 2011, when the markets were down around 7% – history reveals that on average, one in three years deliver negative returns. Investors have, of late, been extremely fortunate.
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.
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 tend to be happy as wealth, at least on paper, increases in value at a specific point in time and unhappy when we reach that value again, if it is achieved after a market fall.
At Wells Gibson we believe real wealth is about much more than money and possessions and many would suggest the true meaning of wealth is having the appropriate level of assets that we require, when we require them, to meet our desired lifestyle. In the interim, movements in value are noise, somewhat meaningless and part and parcel of investing. As investors, we should try to avoid mentally banking the money we (appear to) make on the undulating, and sometimes precipitous, road we are on. Remember too that the headline equity market numbers are unlikely to be your portfolio outcome, as most investors own a balance between lower-risk, defensive assets (bonds) and higher-risk, growth assets (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 this year, according to the IMF, which is not that bad. Today 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.
In the longer-term, investing in the stock market is a game worth playing, at least with part of your portfolio. As Benjamin Graham, a legendary investor in the early 20thCentury once said, “In the short run, the market is a voting machine but in the long run it is a weighing machine.” At Wells Gibson, we could not agree more.