After logging strong returns in 2017, global equity markets delivered negative returns in British pound terms in 2018.
The fourth quarter equity market decline has many investors wondering how equities may perform in the near term. Equity market declines of 10% have occurred numerous times in the past. The S&P 500 returned –11.5% in the fourth quarter while the MSCI All Country World Index returned –10.7%. After declines of 10% or more, equity returns over the subsequent 12 months have been on average positive 74% of the time in US markets and 78% of the time in other developed markets.
The increased market volatility in the fourth quarter of 2018 underscores the importance of following an investment approach based on diversification and discipline rather than prediction and timing. For investors to successfully predict markets, they must forecast future events more accurately than all other market participants and predict how other market participants will react to their forecasted events.
There is little evidence suggesting that either of these objectives can be accomplished on a consistent basis. Instead of attempting to outguess market prices, investors should take comfort that market prices quickly incorporate relevant information and that information will be reflected in expected returns.
While we cannot control markets, we can control how we invest. Put simply, control what you can control.
2018 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. Remember, modern finance is based primarily on scientific reasoning guided by theory, not subjectivity and speculation.