What should investors expect in 2018?
The last few years in the market have been as good as it gets with strong economic growth, increasing profitability, low volatility and surging markets. Everyone wants to know how long will the party last and what will the market do next? As the table below shows, there is little mystery regarding the new year’s expected return.
Regardless of whether last year was terrible or terrific, the average return for the subsequent year is close to the 91-year average of 12%. Compounding the annual returns results in the familiar 10% figure, which is our best estimate of how the market will do in 2018.
Source: S&P Dow Jones Indices LLC
This 91-year period encompasses a wide range of economic conditions and environments. Robert Schiller, a 2013 Nobel Prize Laureate, has shown that market volatility, as measured by standard deviation, has little to do with changing economic fundamentals. Calendar year stock market returns do differ from the long-term average, sometimes by a large degree. These short-term differences however, are primarily the result of unpredictable events and investors reaction to them. Over the long-term, research reveals the market as a no-memory process, with no return correlation from one year to the next.
This time of year, it is a popular pastime to provide market commentary and outlooks for the upcoming year. Last year’s results, data and opinion are assembled into a narrative along with forecasts and implied recommendations. Investors seeking to reduce uncertainty and anxiety are attracted to such prognostications, but as 2017 reminded us again, even the experts can’t predict how the markets will behave over the upcoming year. Acting on this information rarely works out. The market will surely go up and down, the important thing is to stick to your plan in good times and bad.
From the Behavioral Viewpoint
What is going on?
- Because of our Herding instincts, we are attuned to the herd and have a desire to determine what they will do and how to act in response. We don’t want to get left out - we might get lost, left behind or even eaten!
- We are Fooled by Randomness and have difficulty accepting the randomness of annual performance. We want to believe that there is some way to forecast the market and will readily adopt a reasonable story.
- The Fallacy of Control leads us to believe that we can anticipate and control the unpredictable triggers of market volatility. There is a strong urge to act and do something that provides relief and a sense of control.
What can we do?
- While the good times roll, we should enjoy them, but also remember to stay grounded. Now is not the time for big changes based on recent good fortune, nor is it the time for knee-jerk reactions in anticipation of some unknown event.
- Build an investment portfolio with a strategic asset allocation based on long-term goals and expected returns. Use systematic rebalancing at predetermined times to make portfolio adjustments and maintain investment discipline over time.
- An experienced behavioral financial advisor, who has lived through many market environments, can provide perspective and coaching to help stay on track and remain focused on long-term goals.
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IMPORTANT INFORMATION AND DISCLOSURES
The information provided here is for general informational purposes only and should not be considered an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. It should not be assumed that recommendations of AthenaInvest made herein or in the future will be profitable or will equal the past performance records of any AthenaInvest investment strategy or product. There can be no assurance that future recommendations will achieve comparable results. The author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions. AthenaInvest disclaims any responsibility to update such views. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of AthenaInvest.
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