Some Observations on 2018 (before leaving it behind for good….)

My philosophy on investment advice…

While this will focus primarily on reviewing 2018, I do believe it’s worth reviewing my overall philosophy as it relates to investment advice.  Hopefully this isn’t going to be “news” to many of you, especially if you’ve known me for even a few years.

In general, I believe investing should be goal focused and planning driven …which is to say it should not market focused or driven by current events.  Most successful investors I’ve ever known were acting continuously on a plan while failed investors got that way reacting to the economy, markets, or politics.

I won’t pretend to forecast the economy, nor will I attempt to time the markets, nor predict which market sectors will “outperform” near or long-term.  I am a financial planner, not a financial prognosticator.

Once a client family allows me to assist them in putting  a plan in place…and having funded it with what have historically been the most appropriate types of investments…I’ll seldom recommend changing the portfolio UNLESS your long term goals have changed. 

To summarize, my essential principles of portfolio management are fourfold:

  1. The performance of a portfolio relative to a benchmark is largely irrelevant to long-term financial success.
  2. The only benchmark we should care about is the one that indicates whether you are on track to accomplish your financial goals.
  3. Risk should be measured as the probability that you won’t achieve your goals.
  4. Investing should have the exclusive objective of minimizing that risk.

Now, about last year…

Two thousand and eighteen was perhaps the strangest year I’ve experienced in my career as a financial advisor.  With respect to the American economy it was an excellent year in many respects, and certainly the best one since the global financial crisis of 10 years past.   Paradoxically, it was also a year in which the equity market could not get out of its own way.

There are numerous major metrics of the economy which gained ground in 2018.  Worker productivity, which is the long-run key to economic growth and a higher standard of living, surged.  Wage growth accelerated in response to a rapidly falling unemployment rate.  Household net worth rose above $100 trillion for the first time while household debt relative to net worth remained historically low.  For the first time in American history, the number of open job listings exceeded the number of people seeking employment.

Earnings of the S&P 500 companies, paced by robust GDP growth and significant corporate tax reform, leaped upward by more than 20%.   Cash dividends set a new record; indeed total cash returned to shareholders from dividends and share repurchase since the trough of the Great Panic reached $7 trillion.

But the equity market had other things on its mind.  Having gone straight up without a correction throughout 2017, the S&P 500 came roaring into 2018 at 2,674…probably somewhat ahead of itself, as it seemed to be discounting the entire future effect of corporate tax cuts in one gulp.  There ensued in February a 10% correction, followed by several months of consolidation.  The advance resumed as we moved through summer with the index reaching a new all-time of 2931 in late September.  It then went into a severe decline, falling to the threshold of bear market territory: S&P 2,351 on Christmas Eve, off 19.8% from the September high.  A rally in the last week of trading carried it back up to 2,507, but that still represented a solid six percent decline on the year, ignoring dividends.  Two thousand eighteen thus became the tenth year of the last 39 (starting with 1980) in which the index closed lower than where it began.  At the long-term historical rate of one down year in four, that’s actually just par for the course.

A significant “unknown” as the New Year begins is trade policy, which to have any understanding of would require insight into the mind of President Trump.  This and other uncertainties…perhaps chief among them Fed policy and an aging expansion…were weighing heavily on investor psychology as the year drew to a close. 

For whatever it may be worth, my experience has been that negative investor sentiment…and the resulting equity price weakness…have usually presented the patient, disciplined long-term investor with enhanced opportunity.  I’m not expecting anything to alter my view.

As my title suggested, these are observations.  We’ll never know exactly why it was the kind of year it was, but even if we did know the cause, would it really tell us anything about how to avoid it in the future?  I don’t believe it would, which for my money highlights the importance of continuously acting on plan as I alluded to in the first half of this piece.  That IS something we actually can control.

E-mail Kimber with any thoughts you may have regarding this post.