2018: The Year Diversification Didn’t Work

Original post

On September 20, it looked like this would be yet another good year for investors.

The S&P 500 was up 10% year to date. The Nasdaq was up more than 15%. Oil was up 20%.

But that was then. Things look quite different today.

Beginning in October, U.S. large cap stocks, small cap stocks, international stocks and emerging market stocks all started to hit the skids.

As I write, all of them are now negative for the year.

High-yield and high-grade bonds are down too. There has been simply no place to hide.

(Well, real estate investment trusts are up 2%, but that’s about equal to the return on a virtually riskless Vanguard money market fund.)

In a typical year, some asset classes do well, some do very well and some lag behind.

But this year diversification really hasn’t helped.

JPMorgan Chase analysts recently reported that “2018 has delivered losses on almost every asset class and investing style.”

It’s extremely rare that virtually nothing works… but 2018 has been that kind of a year.

Still, it’s worth putting things in perspective.

The 10-year return on stocks is still extraordinarily good, well above average. (Recall that the Dow dipped below 6,500 in March 2009.)

And even though virtually every asset class is down this year, there are plenty of exceptions with individual securities.

Investors who hunt with a rifle not a shotgun – making concentrated investments rather than overdiversifying – still have winners to brag about.

Even widely followed companies that have been pounded over the last few months – like Amazon (Nasdaq: AMZN) and Netflix (Nasdaq: NFLX) – are still showing big gains for the year.

Also, traders who follow our trailing stop strategy locked in profits when share prices started to crumble.

(Yes, they’ve taken a few lumps in recent weeks too. But in my three trading services – The Insider Alert, The Momentum Alert and The True Value Alert – we took literally dozens of profits this year.)

But here’s the important thing to remember…

Less than 20% of all corrections turn into a bear market. But no bull market lasts forever.

And this one won’t either.

Plenty of folks perpetuate the myth that you can predict the market’s short-term moves and avoid the occasional downdrafts.

But – while anyone can make a lucky call now and then – no one accurately and consistently times the market.

More to the point, nobody needs to.

Despite short-term setbacks, stocks have always risen over the long haul. The history of the market has always been higher highs and higher lows.

When a bear market does set in, it’s important to realize that – just like bull markets – they don’t last forever either.

In fact, by the time investors recognize that they’re in a bear market – defined as a decline of 20% from the high – the worst is generally over.

And once a bear market ends, the following 12 months can see crucial market gains.

If you’re investing to reach five-, 10- or 20-year goals, what difference does it make what the market does this year (much less this week or this month)?

Sophisticated investors take volatility like we’ve been experiencing lately in stride, realize that it’s the price they pay for earning much-higher-than-average returns and look amidst the rubble for opportunities often disguised as “scary situations.”

If the market puts on a year-end rally, we may still see positive returns for a number of major indexes.

But that wouldn’t really matter either.

Real investment success is measured in years – not weeks or months – and is usually achieved by those who are able to maintain their strategies, their composure… and their perspective.

Good investing,

Alex