So. You might have heard that 2018 was the markets’ worst year since 2008. Headlines like that can be scary. (Wait, that was the financial crisis! Are we headed for another recession?) Actually, though, 2008 and 2018 were pretty different. Let’s break down what actually happened in 2018 and talk about what you should do — and not do — in 2019.
What happened with the markets in 2018
When people talk about “the markets,” they’re often referring to the S&P 500, an index that includes the largest 500 publicly traded companies in the US. It rose for the first three quarters in 2018, but it was down around 14% in the fourth quarter.
Here’s what the S&P 500 did in 2018, including the impact of dividends:
OK, that looks … less than ideal. But see what happens when we zoom out farther:
Much more positive, right?
You can clearly see the “ouch” that was 2008’s decline. But since then, despite a few bumps along the way, the market’s trajectory has been distinctly positive.
So why did 2018 feel particularly painful?
The market has been abnormally smooth sailing since 2012, with only the occasional short-lived bumps. And actually, the recent volatility is more like the norm — but it feels worse because we’ve had it good. (Kind of like getting back from a beach vacation, when normal winter weather feels extra-terrible.)
What’s “normal,” then? Good question. Analysts often look at the Cboe Volatility Index — also known as the much-snappier “VIX.” It measures expected volatility in the markets (and is sometimes dramatically called the market’s “fear gauge”). The average value of the VIX since 1999 has been about 20 ... which is pretty much where we are today. In 2017, it averaged 11.1. Neither number is anywhere near the volatility levels we saw in 2008 — about 80.
Now, there’s a reason why investment portfolios designed to earn greater returns also have more risk … and why those portfolios are made up of mostly stocks. You can’t earn investment returns without risk; in other words, the stock market doesn’t always rise. That being said, over the past 91 years, the S&P 500 total returns have been positive in about 75% of years. And looking at the negative years, they were followed by a positive one about two-thirds of the time. So 2018’s dip doesn’t mean 2019 will follow suit. Speaking of which ...
What you should not do in 2019
One of the biggest mistakes investors make is trying to time the market by guessing what’s going to happen next. They attempt to “buy low” if they think the market’s going to rise and “sell high” if they think the market’s going to fall.
Not a good idea, and here’s an example of why: Let’s say fourth-quarter volatility made John nervous, and so he sold a big chunk of his investment portfolio right before the market dropped on December 24 (cue alarmist headlines). John might smile, believing that he effectively timed the market. But he wouldn’t smile the day after Christmas — that’s when the S&P 500 logged its best day since March 2009. John would have missed out.
Skipping key days like that can really cost you over the long term. For example, if you had missed out on the market’s best 25 days from 1970 to 2016, you would have earned 371% (3.4% per year) in returns — respectable enough, but it’s nothing compared to the 1,910% (6.7% a year) you’d have if you’d stayed invested the whole time.
Here’s the moral of the story: Unless your future self comes back to give you the markets’ equivalent of the Back to the Future almanac, you can’t possibly know the best days (or worst days) until after they’ve happened.
So … please don’t try to time the market. (Even “experts” consistently fail.)
What you should do in 2019 (and all the time, tbh)
You might have heard us say this before: What has historically been investors’ best course of action is to invest regularly, a bit out of every paycheck, with an eye on the long term.
When you look at your investment accounts right now, they might be down in value. But don’t let it stop you from investing. Instead of dwelling on the current value of your investment portfolio, remember this: When the stock market is down, you can get more shares of stock for the same amount of money. And since the markets have historically trended upward, that means you’ll have more shares available to benefit from a potential market recovery. That’s why you should keep investing, even in down markets.
Plus, when your investment portfolio is tied to a goal — like retiring at age 67 or putting a down payment on a house in five years — it can be built specifically for your timeline. If you’re talking about retirement, for example, you won’t need that money for 20, 30, 40 years — your portfolio has enough time to earn back losses, considering the market’s historic upward trajectory, so the market can do its thing. And if you’re talking about that home down payment, your Ellevest investment portfolio will typically have less stock in it than a retirement portfolio does, so any potential market downturns won’t affect it as much.
Ellevest portfolios are designed with downturns exactly like this (in fact, even much worse than this) in mind. We know that down years are going to happen, and we factor those into your projections.
Investing for the long term means doing so regularly, in a portfolio designed for your goals — and staying invested in both up and down markets. So who needs the extra drama of trying to time the market? Not you. Stay strong and invest on.
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