The record-setting low volatility of 2017 sure seems like a distant memory. This past year reminded everyone that investing for long-term success seldom features smooth sailing year in and year out. Volatility has been the price of achieving gains over time. The global equity markets experienced major pullbacks in the first and fourth quarters of 2018 with the S&P 500 falling 9.2%1 in the final month of the year. This marked the worst December for the index since the Great Depression2. How about that for disappointing trivia? Fears arising from the U.S. Federal Reserve’s interest rate policy and trade tensions with China contributed to the volatility, leaving us with a rare year where cash was the strongest performing major asset class3. In other words, it was a “risk-off” year with not many places for investors to hide.
After the roller coaster that many investors experienced last year, we at Encompass feel that it is vital to review one of the main lessons that history teaches about volatile markets: Attempting to time the market can be costly if not executed with near perfection, and staying invested has been a more productive long-term investment strategy.
When equity markets rally from steep declines, the bounces tend to be strong and fast. Many of the best days for stock market returns occur early in a recovery and missing them could have a dramatic impact on the growth of one’s portfolio. As seen in the table below, with a $10,000 initial investment, just missing the S&P 500’s 10 best days since the start of 1988 would have cost an investor over $100,000 in gains. That is a lot of dollars. However, some argue that this analysis ignores the potential benefits of being uninvested on the worst days. In our view, timing the market is extremely difficult and the risk of being incorrect outweighs the reward over the long-term. Amazon.com does not sell crystal balls for a reason.
|Jan 1, 1988 – Dec 31, 2018||Annualized Return of the S&P 500 Index4||Growth of $10,0004|
|All Days During Period||11.28%||$201,724|
|Missed 10 Best Days||8.50%||$100,673|
|Missed 20 Best Days||5.90%||$62,395|
|Missed 30 Best Days||4.30%||$41,073|
Entering 2019, many of the same risks persist that worried investors last year. Trade tensions have yet to be resolved, Jerome Powell and friends may continue to raise interest rates, and there are signs of moderation in the global economy. These factors will attract close scrutiny by Wall Street and clients should be prepared for still more volatility, not less. As history instructs, rather than panicking and running to cash, Encompass recommends that we review your portfolio together to ensure that diversification is adequate and revisit the question, “Is your risk tolerance what you thought, and might some changes be in order?”
2 Business Insider
3 JP Morgan
4 Standard & Poor’s and Lord Abbett