Would it surprise you if I said your investment success in 2018 had much more to do with your personal investment behavior rather than the overall market returns? This may sound counterintuitive, considering market returns for 2018 were pretty bad. My guess is you’re not feeling like you were a very successful investor last year, but let’s more fully consider what defines a successful investor.
Attributes of a successful investor
- Met or exceeded your annual savings/investing goal for the year (typically this should be at least 15% of your gross income)
- Avoided any unplanned withdrawals
- Started the year with an allocation consistent with your risk tolerance and growth needs
- Made sure your investments were allocated in a well-diversified portfolio
- Rebalanced periodically throughout the year to your target allocation
- Avoided emotional or reactionary changes to your investment strategy
- Avoided an unhealthy preoccupation with the financial news media
- Took advantage of tax advantaged and tax efficient investment strategies
- Harvested tax losses, as necessary, and made charitable contributions with long-term capital appreciated securities
- Stayed focused on your long-term goals despite short-term fluctuations in the market
- Met at least twice a year with a fee-only financial planner to update your plan and make any helpful adjustments
In summary, if you were able to demonstrate many of the attributes named above, I would submit that you were very successful in 2018.
Now let’s deal with the less than stellar market returns for 2018. The S&P 500 Index which consists of the largest 500 US stocks had a return of -4.62%. A portfolio consisting of 100% stocks diversified across 7 different stock categories (large-cap growth & value, mid-cap growth & value, small-cap growth & value, and large-cap international stocks) had a return of -7.83%. A balanced portfolio consisting of 50% stocks allocated across the same 7 categories and 50% bonds had a return of -3.81%. Clearly, this was not a good year for market returns, but let me remind you that occasional losses are part of the process of being a long-term investor. In fact, for every 3 positive years we should typically expect 1 negative year on average. At times, this feels like we are not making the progress we need. Let me assure you this is not the case. We can observe the tremendous power of compounding growth by looking at a onetime investment of $10,000 into the three portfolios mentioned above from 1970 to 2018. The S&P 500 portfolio grew to $1,168,180, the 100% stock diversified portfolio grew to $1,468,151 and the balanced portfolio grew to $789,547. So even with the less than stellar returns of 2018, these portfolios experienced phenomenal growth. For many investors this growth is exactly what they seek and need to meet their goals.
So let’s turn our attention to 2019. With respect to the broader market, there are definitely some positives we can point to as well as some real areas of uncertainty. Even with this information, we don’t know exactly what the market returns will be in 2019, but we do know what it takes to be a successful investor. Our goal for 2019 should be to be in control of what matters most, OURSELVES, and with that control, we should exhibit great personal investment behavior in 2019. This will do more to ensure our long-term success than endlessly worrying about our near-term returns, consuming way too much financial news media and making reactionary decisions in our investment portfolios.