The Long Term Perspective – Is 2018 Out of the Ordinary for the Stock Market

Well……no! But let’s dive a little deeper and flush this out a bit.

2018 is turning out to be not such a good year for global stock markets and investors. As of the writing of this article, global markets are down close to -13% in aggregate. The S&P 500 is looking to mark its first possible down year since the Great Recession of 2008.

While investors may be starting to get nervous and think that 2018 is a predictor of what is yet to come, it is important to take a deep breath, turn off the noise, and apply a long-term perspective to what just happened.

2018 is not something for the history books.

In fact, we have experienced something similar or worse 10 other times over the last 90 years, which comes out to about 11% of the time. But while the news would like you to think the world is coming to an end to boost their own ratings, this isn’t something that we can consider an “anomaly” or what statistical geeks like myself like to call a “tail event.” Would you be surprised if I told you that since 1928 we have experienced a similar market move to the upside 14 times (i.e. a globally diversified equity portfolio returned more than 34% in a calendar year)? More importantly, we would expect a market movement like what we have experienced about 7% of the time or once every 14 years just by random chance alone. Aside from the Great Recession of 2009, we haven’t seen global markets down this much in aggregate since 1990 when Vanilla Ice’s “Ice Ice Baby” was topping the U.S. music charts. In other words, we are about due for a 2018 type of year.

Stats Don’t Lie

Statistics can tell us a lot about “odds” or how frequently we can expect a random series of events to occur. Fortunately for us as investors, we have a wealth of data about stock markets across numerous market events such as economic depressions, expansion, world wars, hyperinflation, the falling of entire sovereignties, housing crises, etc. In short, capital markets have been battle-tested and through it all there has been one common theme: markets will be volatile, but the odds are in your favor as long as you don’t do a couple of key things. One of these is to lose your nerve during a down market. This alone probably has the single biggest impact on your long term financial success.

Key takeaway for investors are the following:

  1. 2018 isn’t indicative of anything. In fact, it is an important reminder that you are taking risk by investing in stocks and you must go through some pain in order to enjoy the long term gain they provide over the long term. The key is to figure out how much pain in order to achieve your long term financial goals.
  2. Your personal financial plan should have already considered experiencing a year like 2018. An excellent financial advisor would have run simulations that consider years such as 2018 and its overall impact on your financial plan.
  3. Now is a great time to rebalance your portfolio (i.e. sell bonds and buy stocks). Am I out of my mind? Nope. I am sticking to my long-term plan.
  4. Tune out the noise. It will do nothing to inform you. All it will do is raise your stress level and possibly force you to succumb to those bad investing habits we and our financial advisors have tried hard to do away with.

Keep the long-term perspective my friends.