Putting Your Portfolio's Performance in Perspective

By: Craig Fehr, CFA December 12, 2018

As we look back over the past 12 months – and ahead to next year – it's important to keep things in perspective when it comes to your portfolio.

The stock market spent a good portion of 2018 ascending to new highs. These rallies might prompt investors to wonder why their portfolios aren't also setting record highs. However, stocks also experienced two 10% pullbacks this year, the first calendar year to contain two market corrections in the S&P 500 in more than a decade. And, it’s in those periods when investors prefer their portfolios don’t resemble the market.

So, how do you – as a long-term investor – keep things in context over time? When you evaluate your portfolio's performance, consider these six tips to help keep you focused.

  1. Things change over time. In 1982, the Dow included Sears Roebuck & Company, Eastman Kodak and Goodyear Tire and Rubber. Today there’s Boeing, Nike and Apple. The index’s makeup has changed with the economy over the last century; likewise, over time, your portfolio should also evolve along with your personal situation. Adjustments to your goals, time horizon and comfort with risk will influence necessary changes in the composition of your investments. As a result, you should anticipate the fluctuations and potential returns of your portfolio to evolve over time.
  2. Performance isn’t just gains. Maximizing gains is not the sole objective of a sound financial strategy. Building a more balanced investment mix is intended to protect against downside as well. That means performance should be evaluated by the combination of return and risk.
  3. Expectations are important. Seeking higher returns from low-risk investments or chasing gains in investments that are riskier than you’re comfortable with can result in disappointment. Make sure expectations for your portfolio are:
    • Relevant (based on your goals, not a stock index)
    • Realistic (appropriate considering your investment mix, time horizon and market environment)
    • Reviewed (evaluated regularly and measured against progress toward your goals)
  4. Use an appropriate time frame. Because your financial goals are longer-term – you should evaluate your progress toward them with the same perspective. Over the past 40 years, when evaluated monthly, the stock market was positive just 64% of the time. But by evaluating it over 10-year time frames, performance was positive 94% of the time.* Your performance should be looked at over broader periods of time and measured against the progress toward your goals.
  5. Don’t forget about diversification. In 2018, the S&P 500 delivered stronger gains in the January and midyear rallies, but fell by an average of 9.5% during the February and October pullbacks. Conversely, bonds and international stocks performed better in those same periods. Over the last 10 years, there have been nine different asset classes in the top two spots for annual performance and seven different asset classes within the bottom two annual performers. Simply put, leadership rotates.
  6. You can’t control the market, but you can control your actions. As we enter 2019, we think conditions are still generally supportive, allowing the bull market to continue. That said, the mix of risks and tailwinds has become more balanced, and we expect ongoing volatility. We think key themes in 2019 will be:
    • Positive but slower economic growth. Here at home, we expect slower growth as consumer spending and housing investment decelerate. In the U.S., rising wages and business investment will be partially offset by fading effects of tax cuts. And globally, the European and Japanese economies could gain a bit of footing but the slowdown in China will weigh on world GDP growth. Simply, we don't see a recession emerging in 2019.
    • Increased corporate earnings, but rising at a slower pace. Rising labour and input costs will eat into record profit margins, slowing the rate of earnings growth from 2018's strong pace.
    • Shifting central bank policies. After nearly a decade of unprecedented stimulus and record-low rates, central banks in Canada, the U.S. and around the world are withdrawing stimulus. We think the U.S. will remain in the lead on this front, with slightly more caution from the Bank of Canada and a tightening cycle overseas that is still in the very early stages. We think interest rates will continue to move gradually higher in Canada and the U.S.
    • We might see periodic market swings in response to a carousel of risks such as fluctuating oil prices, Italian government debt, the Brexit transition and escalating trade tensions

All told, we think the fundamental outlook remains positive for 2019, and periods of volatility will remain a compelling buying opportunity for long-term investors. As you start the year, take the opportunity to review your situation with your Edward Jones advisor. As you evaluate your return needs and comfort with risk, consider opportunities to rebalance your equity-fixed income mix, as well as add to gaps in your portfolio that have emerged from the recent market fluctuations.

*Source: Morningstar Direct, 1/1/1976 - 9/30/2018. 100% stocks represented by the S&P 500 Total Return Index. Past performance is not a guarantee of what will happen in the future.

Equity investments carry risk, including the loss of principal. There are special risks inherent in international investing, including currency, withholding taxes and high levels of taxation, political, social and economic risks.

Important Information:

This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.

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