If you’re like most investors in America, 2018 was not your favorite year when it comes to your investments. After nearly a decade of great returns in the stock market, 2018 really poured some cold water on the party. The S&P 500 index was down -4.38% (if you include reinvested dividends) for the year. That’s not a big negative number for a down year really. But chances are, it felt much worse than that for you. This is because from the market’s peak in late September, it dropped 20% to it’s lows on Christmas eve. Merry Christmas, right? If you had any technology stock exposure, you saw an even bigger drop with many of the big tech names dropping over 30% during that period. Things did recover some by the end of the year, but not even close to all of it.
Normally when stocks go down in a given year, bonds go up in value. This is why we diversify our money into both stocks and bonds. 2018 was a very unusual year, far from normal. Bond prices have an inverse relationship to interest rates. So, when interest rates go up, bond prices go down. The Federal reserve has been raising rates lately, and that has made bond prices go down. This is why 2018 was a year where both stocks and bonds LOST value, making it extremely difficult to find places to make money. Bonds didn’t lose anywhere near what stocks did in the 4th quarter. But a typical intermediate term bond fund that you’ve been used to seeing 4-6% annual returns, in 2018 was down about -.5%. Not a huge loss, but when you add that to your negative stock returns, your 401k statement isn’t looking so good.
Is the worst of it over?
Only time will tell if we’ve seen the bottom of this recent stock market correction. A 20% decline or more is definitely a correction of a healthy sort, and we were probably overdue for it. However, if you take a step back and look at the big picture of where we’ve come since the stock market lows of 2009, we are still at some pretty high levels. Here’s a chart showing the S&P 500 index from 1995 until yesterday.
The economy is still doing pretty darn well right now. And there’s a good chance that the Fed may pause on the interest rates hiking, which the stock market would like very much. If we work out a good trade deal with China and the tariffs don’t happen, the market will also like that very much. So there’s a good possibility that 2019 could be a better year for the stock market. However, it’s important to keep all this in perspective of where we are, and where we’ve come from since 2009. It’s been almost a full 10 years since the last recession ended, which is a pretty long time to go between recessions. Eventually, we’re going to have another recession.
What should you do?
If your account balances went down by more than about 4.5%-5% last year, then it would be a very good idea to sit down and review your holdings and find out why that happened. You might have too much international exposure, or you might be too concentrated in something else that is hurting you. You might be invested in high volatility funds/etf’s. There are a lot of reasons why your performance was worse than the overall market.
Here are a few question you should ask yourself.
- Are you taking more risk than you need to be?
- Is the volatility of your investments too high?
- Do you want to make sure your money is protected in case the market drops again?
- Do you have too much concentrated exposure to any one stock or sector of the market?
- Do you know if your investments fees are too high?
Give us a call today to set up a complimentary review of your portfolio. Or, CLICK HERE to schedule an appointment now.