This article is part of a regular series on thought leadership from some of the more influential ETF strategists in the money management industry. Today’s article is by Michael McClary, chief investment officer of Akron, Ohio-based TOPS ETF Portfolios.
Investment markets finished 2018 on a sour note, with the S&P 500 dropping 10% in the last four weeks of the year. Many investors are struggling to remember the last time investment markets delivered a negative calendar-year return, as U.S. stocks have been riding a bull market for almost a decade.
The prolonged bull market in U.S. stocks and the extremely low volatility of 2017 have made 2018 feel like a splash of cold water.
It is important for investors to note, however, that 2018 was more “normal” than 2017.
Investment markets, and the underlying economies, are expected to experience natural cycles over time. Trees don’t grow to the sky and asset prices typically don’t go to zero. While our minds tend to recognize trends and expect them to continue indefinitely, the natural oscillations of investment markets are the norm rather than the exception.
Risk aversion is an essential part of investing. Investors by nature are risk-averse, and the collective risk aversion of investors is what makes markets function.
However, it is risk aversion that makes us dislike experiencing the expected downward slope of the cycle, even though rational investors understand markets that benefited from abnormal appreciation are more likely to experience a cyclical correction than to continue growing toward the sky.
It has been said that investing is simple, but not easy. This is especially true for risk-averse investors. Hopefully, the following five key thoughts will be helpful to investors as we start 2019, and serve as a useful tool to make sense of current markets.
1. Most equity investments were in the red in 2018
Investment results for 2018 will be confusing for some investors. While the S&P 500 was down for the year about -4.4%, it was still one of the best-performing global indexes for the year. Therefore, most diversified portfolios underperformed the S&P 500 in 2018.
Source: Bloomberg. As-of 12/31/2018
High-quality fixed income has rallied as the market correction has intensified, which has provided diversification for balanced accounts.
Source: Bloomberg. As-of 12/31/2018
