As many of you are thinking about 2018 and the future of the markets, remember that the sun will shine tomorrow! Did you know that 80% of the time you have sunny days (up markets) and only 20% of the time does it rain (down markets)? In the last 10 years, we have had two down years, one slightly down in 2011 and one again in 2018; the 100- year statistic is true! Does that mean we will be up in 2019? Not at all, it’s possible that we are down in 2019 and in 2020, and then we have eight straight years of up markets, and any combination in between. In this new year article, I thought I would talk about a couple of main ideas. One is why don’t we just get out of the market and wait it out. Second, what has been going on and what should we do, if anything, about it.
One question I frequently get from my clients is if the market drops more than X percent, why don’t we just get out and get back in later when the market “stabilizes”. Sounds like a legitimate strategy, but if you really think about it, that strategy means you get out of the market when it’s down and get back in when it goes up again…..exactly the wrong thing to do for any investor. Here is a chart with data to back that up! In the last 37 years (around 7,000 trading days), if you simply missed out on 25 of the best days of the market, then you would have lost out on 90% of the gain in that time period. What that tells you is stock market returns are highly concentrated. Missing just a few days could mean you miss out on a bulk of your life time of returns. Those are not odds I would mess with…staying invested in all markets is the best strategy! It’s possible we saw that sort of a day last month when the DOW was up 1,000 points in one day. What if you got out before that, waiting for a way to get in? That’s a HUGE loss for investors to have missed that.
Reacting Can Hurt Performance
Performance of the S&P 500 Index, 1990–2017
Another question I’ve been getting lately is why do we bother with international investing? Doesn’t the US market always have better returns then the rest of the world? We do have the strongest economy, best innovation, and of course the sheer size of our economy. Interestingly, that is not true! As a matter of fact, in the last 20 years, the US was the number one returning economy only once. That means, if you betted just on the US in the last 20 years, you were wrong 19 years…. again those are not odds I would mess with. Staying diversified is the best strategy! See the chart below that highlights the highest and lowest country returns starting from 1998.
Equity Returns of Developed Markets
Annual Return (%)
Since the start of 2019, the markets have actually been up all across the world. Why is that? We still have a trade war with China, about half of our government has been shut down, and there is still lots of uncertainty about economic growth as the “sugar-high” from the tax cuts wear off. Well, unfortunately, there really isn’t any great reason. Markets go up and down, and often for no good reason. We saw a steep sell off in December, and then we have seen an upmarket in 2019 – the world hasn’t changed a bit, just the markets have. That means, as a long-term investor, you have to stay the course. Unless your goals have changed in the past few months, sticking to a diversified portfolio is the only prescription that will work. Yes, you have “friends” that got in and out and sounds like geniuses at parties. But I can assure you, they will only tell you about their winners, not when they lost money or timed wrong; that’s human nature!
In 2019, we will be starting to host webinars that will give you more insight into the markets, our portfolios, and in general more education. Stay tuned for those! Meanwhile, if you have any questions or concerns, your Redwood team is here to assist! Thank you for your patience and trust.