Everyone knows how to win. Few know how to lose. Yet the secret to making money in the various markets is knowing how to lose and how to control your losses. In the book Warren Buffet calls the best book ever written on investing, namely Benjamin Graham’s THE INTELLIGENT INVESTOR, it notes:
“The essence of portfolio management is the management of risks, not the management of returns. All good portfolio management begins and ends with this premise.”
I learned early in my career that if you manage the downside in a portfolio, and avoid the big loss, the upside takes care of itself. Indeed, knowing how to lose, how to control your losses is the key to successful investing!
Here are the performance results from major stock market indices and sectors in 2018:
Canada S&P/TSX Composite: -11.6%
Canada S&P/TSX Small Cap: -20.1%
U.S S&P 500: -6.2%
U.S Russell 200: -12.2%
German DAX: -18.7%
London FTSE: -12.5%
Japan Nikkei: -12.2%
MSCI Emerging Markets: -16.6%
Copper: -21.7%
Crude Oil WTI: -24.8%
Currency CAD/USD: -7.8%
Most of you; my clients, on average have mitigated much of these severe losses with portfolios affected anywhere from -2 to -5 in 2018. The good news is we have already experienced a recovery from the 2018 decline in the month of January 2019 alone.
As we head into 2019 we do so with a significantly different outlook than a year ago. At the start of 2018, we were talking about global synchronized growth and an increasing breadth of investment opportunities. The aggressive trade tariffs initiated by President Donald Trump’s administration in 2018 changed the global tone dramatically, slowing the economies of major trading partners as capital investment decisions were deferred. As we enter 2019, the dampening effects of trade hostility have had a slowing effect, and leading economic indicators in most economic regions are trending downwards. Whereas the tagline last year was “synchronized global expansion,” the sentiment this year is closer to “synchronized global slowdown” – a very different mindset.
Looking Ahead at 2019
Stock markets have always been leading indicators. That means what we typically see in the stock market is what will eventually happen in the economy. In September 2001 we had a severe market correction, the following year in 2002 the economies entered a recession. In 2008 the stock market had a severe market correction (one of the worst since the Great Depression), and sure enough in 2009 we experienced a recession which resulted in an unprecedented amount of Government stimulus, some of which continues to this day in the Eurozone. The good news is after a correction in the market like we experienced in the end of 2018, statistically the following year the market ends positively.
Bottom line, we need to set aside some of the daily noise we hear in the news and bring it back to the fundamentals that have historically been the driver of returns: recession risk, earnings risk and valuation risk. In this regard I can only characterize the volatility through the fourth quarter as anything other than a common correction that has been driven by diminishing global economic data that has been amplified by headlines and noise.
Global growth remains positive but has become more uneven, which will likely create more market volatility. After enjoying solid and accelerating global growth in 2017 and throughout the first half of 2018, momentum has faded. I expect this trend to continue into 2019.
We continue to be defensive in our portfolios with bonds paying us interest, and holding companies that continue to pay us dividends. Moreover, the sectors we hold are more insulated to shocks in the system which is why we have fared much better than the markets last year.
As always if you have any questions regarding your portfolio please don’t hesitate to contact me.
Have a great weekend,
Tracey
Sources; TD WEEKLY REPORT for December 31st 2018