How Good Were Stocks in 2017

International stocks continued the hot streak and finished the year well ahead of US stocks, while both categories did much better than Bonds.   The following is an excerpt from the Matson Money quarterly statement.

“The 4th quarter of 2017 saw a continued increase in broad equity markets,  both domestically and internationally. U.S. stocks grew by 6.64% as represented by the S&P 500 index, while international stocks had another  positive quarter to book-end their stellar 2017, with the MSCI EAFE index  returning 4.23% for the quarter. After underperforming U.S. stocks for the last several years, the EAFE returned 25.03% for the year, leading the way against  U.S. stocks. Additionally, emerging market stocks outperformed both  domestic and developed international stocks, with the MSCI Emerging  Markets Index rising by 37.75% for the year.

In recent history, we have experienced an extended period of rising returns. Using the S&P 500 Index as a proxy for the stock market, there have been 14 consecutive positive months, and 21 of the last 22. Extending this time-period out longer, over the last 5 years 19 of the 20 quarters have been up. While periods of up markets returns are undoubtedly easier to go through than those of volatile and/or down markets, they can have negative consequences on investors just the same. Many investors equate the idea of “staying disciplined” to not panicking and selling equities while they are down, and indeed, this is an important trait. However, staying disciplined is equally important and can be equally as challenging during times when everything seems to be going well. Deciding upon a personal risk tolerance and time horizon for your investments is one of the earmarks of a sound financial plan. In 1996, then-Chairman of the Federal Reserve Alan Greenspan coined the phrase “Irrational Exuberance” to describe investors who let their current emotions resulting from a hot stock market supersede rational, prudent investing. In simpler terms, they were ignoring their personal risk tolerances because of a period of favorable returns. An argument can be made that managing behavior is the most important aspect of being a good investor. Unfortunately, it is probably also the most difficult part of being a good investor. Despite Greenspan’s warning, many investors loaded up on investments that were riskier than what was prudent for them. Not only by increasing equity exposure, but by investing in hot sectors such as tech start-ups. The idea of missing out on the returns that one perceives that  others are receiving can be a strong motivator.

Unfortunately, many people who overextended themselves were exposed to dramatic losses. From September 2000 to September 2002, the S&P 500 lost over 44% of its value, and the NASDAQ, which is an index of tech company stocks, fell 78% in 30 months from peak to trough, with many individual  companies going to zero. In today’s environment, there is a danger for some investors to repeat the mistakes of the past. With stocks going up 19 out of 20 quarters, it can be easy for one to ignore the downside risk of equities and try to ride the current wave of good returns.

In the 90’s, many investors saw those around them supposedly getting rich by owning start-up companies that were taking advantage of a new paradigm of technology. In the same fashion, today cryptocurrencies are the hot new technology. While no one truly knows how long stocks will continue to rise or how high Bitcoin may go, it is important for investors to not get caught up in the hysteria and stray from the level of risk that they can handle. In the end, choosing a wise financial strategy -and sticking to it -can have  tremendous impact on an investor’s long term financial health. Chasing performance through buying and selling is a risky game. Historically speaking, it will only reduce an investor’s real return. Relying on unbiased, non-emotional advice from a trusted investor coach to make good decisions can help an investor bridge that gap between what the average investor makes and the return of the market.”

References

  1. Matson Money. “Account Statement.” Letter to James Hancock. 15 Jan. 2018. MS.

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