The farther back you can look, the farther forward you are likely to see.
As we review the incredible stock market performance of 2017, it is important to review our philosophy of advice – that successful investing is goal-focused and planning-driven, instead of market-focused and performance-driven.
Another way of saying this is that the really successful investors act continuously on a plan—tuning out the fads and fears of the moment—while the failing investors are continually (and randomly) reacting to economic and market “news.”
The nature of successful investing is the practice of rationality under uncertainty. We will never have all the information we want, in terms of what’s about to happen, because we invest in and for – an essentially unknowable future.
Therefore – we practice the principles of long-term investing that have most reliably yielded favorable long-term results over time: planning; a rational optimism based on experience; patience and discipline. These will continue to be our fundamental building blocks of our investment advice in 2018 and beyond.
Now a look back at 2017 – a genuinely great year for equities—with muted volatility. With a total return of 21.83% for the S&P 500, and the deepest intra-year price decline a mere three percent (versus the average, since 1980, of 14%), our philosophy of staying the course was well rewarded in 2017, with a bare minimum of volatility. The International stock markets were even stronger – 25.03% as measured by MSCI EAFE (USD).
As stated earlier, we are long-term equity (stock) investors who know that markets can’t be timed. We remain positive on the equity market for the coming year. However, we can’t predict that the returns in 2018 will match 2017, or that volatility will remain this calm. Equity investing isn’t often as easy as it was this past year.
If you recall, at the beginning of 2017, a common view among money managers and analysts was that the financial markets would not repeat their strong returns from 2016. Many cited the uncertain global economy, political turmoil in the US, implementation of Brexit, conflicts in the Middle East, North Korea’s weapons buildup, and other factors. The global equity markets defied their predictions, with major equity indices in the US, developed ex-US, and emerging markets posting strong returns for the year.
The broad global advance underscores the importance of following an investment approach based on diversification and discipline rather than prediction and timing. Attempting to predict markets requires investors to not only accurately forecast future events, but also predict how markets will react to those events. The 2017 markets were a good reminder that there is little evidence suggesting either of these objectives can be accomplished on a consistent basis.
Instead of attempting to make predictions about future events, investors should appreciate that today’s price reflects the expectations of market participants and information about future expected returns. The following quote by the late Merton Miller, Nobel Laureate, describes this view:
Everybody has some information. The function of the markets is to aggregate that information, evaluate it, and get it incorporated into prices.
The chart below highlights some of the year’s prominent headlines in the context of global stock market performance as measured by the MSCI All Country World Index-Investable Market Index (MSCI ACWI IMI). These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.
The year of 2017 included numerous examples of the difficulty of predicting the performance of markets, the importance of diversification, and the need to maintain discipline if investors want to effectively pursue the long-term returns the capital markets offer.
The following quote by David Booth – founder of Dimensional – provides useful perspective as investors head into 2018:
The key is to have the correct view of markets and how they work. Once you accept this view of markets, the benefits go way beyond just investing money.
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