Takeaways from 2018


2018 was the most volatile calendar year for global markets for some time, with the worst return for global equities since 2011.  The final wash-up of returns for the 12 months to 31 December 2018 are summarised below:

Australian Bonds +1.9%

Global Bonds +1.7%

Australian shares -3.1%

International shares (unhedged) +1.5%

International shares (hedged) -7.6%

Emerging markets -5.1%

Australian listed real estate trusts +5.2%

International listed real estate trusts (unhedged) +4.9%

Across the developed markets of the world, the returns of the major sectors are shown below:


Volatility is Normal

The step-up in volatility towards year-end was variously attributed in the media to US-China trade tensions, signs of a global economic slowdown and concerns about the US Federal Reserve’s plans for further interest rate increases in 2019. For the Australian stock market, the 3% fall was the first annual decline since 2011.

If you religiously follow the financial media (which you shouldn’t do), you may think the type of “volatility” experienced in 2018 is (a) unusual and (b) bad.  Neither is true.

Volatility is normal. 

For the period 1979-2018, the US stock market – the largest in the world – had an average intra-year decline of 14%[i].  About half of the 39 years had declines during the year exceeding 10%, and almost one-third had declines exceeding 15%.  In 2018, the US stock market dropped almost 20% from the middle of September until Christmas Eve.  Since then it has bounced back almost 10%, with most of the rebound occurring on 26th December when the US market rose 5% in a single day.  Imagine if you’d sold out in mid-December and missed that single day!

Clearly, there is nothing abnormal about stock market volatility.  It simply reflects the randomness of the world at large.

And volatility doesn’t always portend problems for investors.  In 33 out of the 39 years, calendar year returns were positive, despite the intra-year declines.  So in general, investors who ignore market volatility and hold their nerve are rewarded.

Investors in stocks are rewarded over time for taking the risk of holding those stocks instead of a lower volatility bond or fixed interest portfolio.  If there was no volatility, there would be no risk in holding stocks, and the expected returns of stocks would be much lower. 

Many proponents of hedge funds (who invest in alternative or illiquid assets) claim that a key attraction is the downside protection they provide. However a HSBC report showed that in 2018 - a year of volatility when hedge funds’ worth supposedly shines through - only 16 from a universe of 450 funds followed by HSBC managed to deliver positive returns before fees.

Some investors will always favour stock picking

If you exclude everyone who makes money touting traditional active management – being stock picking and market timing – like brokers and the financial media, can you name anyone credible (like a Nobel Laureate) who has objectively looked at the data and concluded that trying to “beat the market” by stock picking or finding the next “hot” active fund manager is a responsible and intelligent way to invest?

We can’t.  But we can name many Nobel Laureates who publicly support how we approach investment.

So if 74% to 89% of active Australian managers underperform their benchmark over 10 years[ii], why do most investors still invest this way?  A recent study attempted to solve this anomaly[iii].

It concluded investors are victims of the “conjunction fallacy”.  Because hard work generally pays off in most areas of life, they believe the same must be true with investing.  But this belief – that the harder you work on your investing the better your returns will be – simply isn’t true in investing. 

Traditional active managers exploit this fallacy by advertising their talent, resources and hard work, reinforcing the myth that these traits lead to higher expected returns. 

As further evidence, a recent report showed not one of the Ivy League (i.e. Harvard, Yale) endowment funds managed to outperform a passive portfolio of 60% US stocks and 40% bonds over the past 10 years[iv].  What’s more, the volatility of the endowment model – which includes large allocations to private equity, real estate, infrastructure and other illiquid investments – is significantly higher than that of a simple mix of stocks and bonds.

Many recent articles in the media have tried to predict what may happen in 2019.  No one will get it right.  But if you’re looking for honest answers to commonly asked questions, here is Stewart Partners’ guide to 2019:

Are stocks overvalued?

We don’t know.  All we know is that the views and expectations from market participants are already built into prices and markets go up over time.

What are the signs I should look for that predict a market correction?

There are none. (If you can find a reliable methodology, there is a Nobel Prize waiting for you!).

What’s your view of technical stock analysis to pick winners and losers?

We agree with this quote: The only thing we know for certain about technical analysis is that it’s possible to make a living publishing a newsletter on the subject.

Do you have any predictions for 2019?

Yes. Those who have a tailored, individual plan and support this strategy with a broadly diversified portfolio in low-cost funds that employ our evidence based factor approach, and stay the course, will increase the probability of living the best life they can imagine.

Do you have an investing goal for 2019?

Make your investing about as interesting as watching paint dry.  Leave the excitement to others.

Can you recommend a video to watch?

Yes.  This one: https://www.stewartpartners.com.au/what-we-do/investing/


Author: Rick Walker

[i] Recent Market Volatility, Index Funds Advisors Inc, 24 December 2018

[ii] Data Source: S&P SPIVA Australia Scorecard December 2017. Australian equities compared to ASX 200 Accumulation Index, International equities to MSCI World ex Australia Index

[iii] Working hard is bad for investors, Dan Solin, 9 January 2019

[iv] https://www.institutionalinvestor.com/article/b1c1c4tq2bjm3c/Not-One-Ivy-League-Endowment-Beat-a-Simple-U-S-60-40-Portfolio-Over-Ten-Years

Rick Walker