A Lost Year in the Markets?

The last year for the stock market has been one of severe ups and downs. Many people think that in addition to the tax cuts which do not appear to have panned out the stock market has followed suit as well. And to illustrate this point much as I did with the tax issue I will use my own accounts as an example. The federal government mainly employs me so in place of a 401(k) I have my Thrift Savings Plan which is extremely similar to a private 401(k) plan.

So how does 2018 stack up with 2017 you may ask? Well, it is fair to say that this year did not do as well as previous years and there could be some reasons as to why. Some could state that we are due to have a correction or a bear market as we have enjoyed a bull market for nearly a decade and corrections are after all part of the market’s normal cycles. And if it is a bull to bear switch, these are typical as well and nothing to get overly excited or worried about. After all, we are investing for the long-term, and I am not advocating short-term trading.

Other reasons why we have had a lost year could reside in the massive tax cuts that were passed almost a year ago, and that has not seemed to pan out as expected. Why do I say that? Well it is mainly based on the information I provided in a previous post on taxes and how many people will be surprised come tax season when they owe more or did not have enough taxes withheld from their paychecks. And with reduced taxes came reduced revenue for the government, in turn, increasing the national deficit even more. Why do you ask? Well, as with any normal business the government receives its income or revenue from taxes paid in by individuals and corporations which have now been reduced. That is a good thing you say but here is the issue, the government did not decrease its spending, and in most instances, it increased government budgets.

Global markets

Then there is the uncertainty of the global markets with regards to trade with America. The world is truly a global economy and one that must interact with one another to enjoy its benefits. Now there are many ways in which equitable trade can be accomplished, and the best possible method is through negotiations, not tariffs. Tariffs and trade wars do not benefit any of the countries involved. It hampers the economic growth of both countries and that in turn affects the rest of the world as well. And business does not like uncertainty in any facet of its operations and global trade uncertainty is something that would have an impact on the markets not only here but around the world.

So by now, you are asking yourself what these numbers I referred to earlier that will prove we have had what is, in essence, a lost year in the markets is. Well, here we go into the world that is my TSP. First, I invest 10% in a broad bond fund, 30% in the S&P 500, 30% in small capitalized stocks and 30% in developed international markets and maintain those percentage throughout the year by rebalancing. Overall this is a fairly well balanced and diversified portfolio and can be replicated in most 401(k) plans.

So, as of December 31, 2017, my portfolio was up 19.05% for the year which I was really happy with as I think most people would be. Then March 31, 2018, my same portfolio was up 12.45% or a decrease of about 6.5% in returns but still a return I was happy with. June 30, 2018, saw annualized returns of 11.03% or an of another 1.5% but one that is still respectable and most people would be happy about and accept in their portfolio. Then we arrive on September 30, 2018, and yet another drop of about 0.25% to 10.73% for a still respectable annualized return. So by now you are saying to yourself a return of almost 11% is great and I would agree but then comes the annualized return for October 31, 2018, and it drops all the way to 0.62% for my same portfolio. That is a massive drop of nearly 10% in a single month which I think most would agree is not one that we would want.

So how do you counteract these results?

So how do you counteract these results? Well, remember not to panic and do not sell now as the prices of equities are not at the level that most of us would accept. Remember, buy low and sell high meaning now is a buying opportunity for many companies that may be selling at or near lows. But beware, not all companies are low now, and many are indeed trading near their highs. So what do you do? You sell some of the positions that are near their highs and buy into positions or new equities that are near their lows. Do not do what many people did in 2009 and sell now after the market has dropped. Now is the time to buy so if you can and have the means do that. Rebalance if you can and enjoy the benefits of selling high and buying low.

I do not recommend short-term investments or trading but rather a long-term approach that will mean you are in it for the ups and downs. Ride out the storm so to speak and if the company is well run and is just being hit with a miss on earnings yet is still solid that means buy more if you can.

For more information, please feel free to leave a message or contact me directly.