It’s hard to feel good looking at media commentary on the performance of stocks in 2015 and 2016 – here’s a sample:
Canada’s year of ‘serial disappointments’ leave investors reeling – Financial Post
5 reasons why the market meltdown matters to all Canadians – Global News
Sell everything ahead of stock market crash, say RBS economists – The Guardian
Analyst: Here Comes the Biggest Stock Market Crash in a Generation – Fortune
This Is Why Stocks Were So Disappointing in 2015 – Money
Stock-market crash of 2016: The countdown begins – Marketwatch
A “year of disappointment” suggests that expectations at the beginning of the year were for a better outcome. Of course at all times people “hope” for positive outcomes but looking at one month or even one year at a time is too short. Investors should not just hope but expect that stocks will go up over longer time periods, but this doesn’t necessarily mean that over short periods of time stocks won’t be volatile and suffer periods of poor performance.
What many fail to appreciate is that in order to actually experience the long term average stock market returns requires being invested during both good times and bad. In fact it’s actually quite rare that markets actually deliver the average rate of return in any given year. When you ask most people what they would expect the long term average return on the stock market to be you might get an answer somewhere between 8 and 10%. For the S&P 500 the annualized compound return from 1926 through 2014 was in fact 10.12%. But how many years did the S&P 500 actually return between 8-10%? Zero! (source: Dimensional Fund Advisors) The average return is elusive in any given year and the evidence shows clearly that trying to time market ups and downs is futile. Fund flow data confirms that most investors move their money in and out of the market at the worst times. Average investor returns over long periods are more like 3 to 4%, much less than returns of the market itself.
So rather than trying to time the market, investors should set themselves up to use market volatility in their favour. This is best accomplished via a sensible target asset allocation based on personal risk tolerance and financial goals coupled with disciplined re-balancing. While emotional reactions to media commentary often leads investors to do what’s worst for their portfolio (i.e selling low and buying high), a disciplined rebalancing strategy will help to accomplish the opposite. This means purchasing asset classes that have underperformed and selling asset classes that have outperformed to bring your portfolio back to its target allocation (buying low and selling high).
The first step for many will be to develop a sensible asset allocation in the first place. For Canadians this means far greater diversification outside of Canada. Canadian stock market performance in 2015 shouldn’t be seen as a disappointment, but it should serve as a warning as to the dangers of relying on too narrow a segment of the investable world.
Rather than a year of disappointment, treat 2015 as a “year of enlightenment”. Improve the way you invest going forward with better diversification, sensible asset allocation, disciplined rebalancing and lower fees.