This time last year equity markets were reaching new all-time highs and the mood was bullish. For those that can remember, this was also around the peak of the Bitcoin bubble with the price around $14,000.

 

Fast forward to now, and most equity markets are down c.10% and the price of Bitcoin has fallen drastically to $4,000 – a fall of c. -70%!

Though a side show to real capital markets, last year’s Bitcoin episode is an excellent example of how human behaviour can create and then destroy bubbles in asset prices. We should not discard these events as trivial but instead study and learn from them as the same human behaviour can also have a similar impact on more traditional markets.

Though not as extreme as Bitcoin, it has been a disappointing year for more traditional investments. After a good run, the recent negative returns are bound to feel unnerving and undoubtedly investors will be feeling unsettled. However, we must remember that the returns in 2018 were not out of the ordinary. In fact, markets have performed like this many times before and will do so again. What is important is that those that have stayed invested and persevered have been rewarded and there is no obvious reason why this should change going forward.

To illustrate, we have reconstructed what we would consider a balanced portfolio. By using indices, we can reproduce what this portfolio would have returned annually since 1999. Though not a perfect representation of actual performance as it does not account for any charges, withdrawals or contributions, it does however give us a relatively accurate idea of how the portfolio would have performed over the past 20 years.

Investment outcomes based on total return. Returns calculated on an annual basis. For illustrative purposes only. Actual investments may incur higher or lower growth rates and charges. Past performance is not a reliable indicator of current and future returns. Data as of 31 December 2018.

 

The above chart should hopefully provide some comfort particularly in light of market performance in 2018. Importantly, what this shows is that most of the time (70%) annual returns have been positive but, as should be expected, these good years are punctuated by years of negative returns. 2018 was one of these years and we should not be surprised when this occurs from time to time.

Everything in hindsight is easier, particularly investing. Looking back at past returns creates a sense of ease around staying invested through market cycles. What we must remember, and particularly now, is that in the present it is difficult to stay the course. For example, if you had invested at the end of 1999, three years later at the end of 2002 you would have lost 15% and probably in the mindset of giving up on investing altogether. However, if you had persevered and stuck to the strategy, today you would be 281% up (from that point).

We know that markets cannot continually go up forever and will always have down years. What is important is being positioned suitably and sticking with the original strategy.

As the new year begins economists and strategists come out with their price targets and predictions for the coming year. We have read numerous 2019 outlooks from big banks and asset managers. Most of them say the same thing with the usual forecasts and predictions. Ultimately, their guess is as good as ours as to what will happen. As we saw in 2018, and like every year before, the world is ever-changing and unpredictable. Trying to accurately predict or forecast what might happen is a thankless task. Instead we continue to put our efforts into making sure you are positioned in a suitable, well-diversified portfolio while communicating the benefits of long-term investing and having the appropriate time horizon.

Hopefully 2019 will provide better returns, but only time will tell.

 

General Disclosures: This article is based on current public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.