The recent stock market bounce is a reprieve.
Use it to re-evaluate long-term strategy.
Where were you from December 3 through December 24, 2018? Hopefully enjoying the holidays. Me? I was navigating the closest thing we’ve had to a true stock market crash since 2009. Oh, and I am not complaining. It’s environments like that where we hedged investors get to show why we believe that simply dumping your money in stock index funds is a foolish strategy for most investors.
After all, as the above chart shows, the losses during that 3-week period were quite heavy. And it did not matter if you diversified between large, mid, small-cap companies, growth or value. All of the so-called “U.S. equity style boxes” made popular by Morningstar all fell by between 15-19%. Did I mention this happened in only 3 weeks?
There was some mild relief if you invested in lower-volatility stocks, as those declines were closer to 10% than 15% or 20%. And non-U.S. stocks lost less than those in the U.S, but those regions were already down a ton before December 3 anyway.
The impact was so severe across the board, it wiped out all, nearly all, or more than all the gains of the prior year and a half in all 9 of the stock market segments shown above. Here are returns of those market segments from June 30, 2017 through that December 24, 2018.
- December 2018 was a crash test. As you know, the stock market rebounded quickly at Christmas, and that rally has stretched into the start of 2019. But that does not change the fact that December was a test for investors. That bounce to start this year was a giant reprieve for those who realized somewhere between the eggnog and the “Happy New Year” greetings from friends that there was a market rout going on. It was an opportunity to call time-out and re-double your efforts to determine if you are invested properly, now that the bull market in stocks could be kaput. Complacency crushes long-term investment strategies. Don’t let it ruin yours.
- The market’s fourth quarter decline may or may not mark a long-term bottom in stock prices. I suspect it will not. But forget about guessing, and just ask yourself “can I afford to just sit there and take it” if the December market lows are broken and an extension of the bear market ensues?
- Bear markets don’t wait around for you to notice them. They often occur on very short notice, and there does not have to be a concrete reason for them to start…or continue. Ignore the media blathering about the Fed this or China that or the latest political banter. It all matters, it is all considered by a very diverse group of entities with a very diverse group of interests in the same markets you and I invest in.
- It is a great time to consider other ways to allocate. Having all of your stock portfolio invested for a long-term bull market works well until that bull market ends. And I am convinced that the markets of this era will be defined by big, extended moves in both directions, in succession. This has been the case since financial TV debuted in the mid-1990s, and I don’t see anything but increasing evidence that market cycles will continue in this manner.
The U.S. stock market didn’t crash in 2018, but it did crack. In 2019, there is a good chance that along with several sharp rallies, more cracks will occur. This will reward more nimble strategies, the same ones that probably rolled off the radar of many investors during the latter stages of the big bull market the past few years. Late 2018 was a crash test…don’t be a crash test dummy.
Oh, and did I mention that the big drop in December only took 3 weeks to happen?
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