Claret

Observations from 2018, Optimism for 2019

As 2019 starts, the market continues its gyrations that began in September 2018. Volatility has indeed increased over the last 3 months but only relative to the last 2 years where it has been quite subdued. We go back 100 years (i.e. since 1920) and look at the day-to-day and intraday volatilities and our conclusion is that markets exhibit nothing more than normal volatility. However, investors have been more conscious of every small move thanks to the internet and the media, making it feel like things have changed. In fact, financial news reporting has changed, not for the better but for the worse.

In times like these, we urge our clients to stay put, keep their eyes on the horizon and avoid looking at the waves in front of them. Here are a few reasons we should stay calm:

  • We don’t know of any correction or bear market that is not followed by another bull market;
  • Price is what you pay, value is what you get. In other words, market valuation is what you pay, earnings and dividends are what you get. We rarely get questions regarding how much dividends a portfolio is generating…. It should be by far the most important question, don’t you think?
  • For most investors still in the accumulation phase, market corrections should be welcomed as they are opportunities to buy cheap. Wouldn’t anybody want to buy when stocks are cheap? As Warren Buffett says, you should buy when everybody is fearful.

A basic strategy that has stood the test of time is one of Dollar Cost Averaging: instead of trying to time the market, most investors should buy the same amount of money in equities in regular intervals in time: for example, investing $2,000 every month over a long period of time. This strategy fulfills several sound principles of investing:

  • Over the long term, free market economies tend to grow and so do their related stock markets, albeit punctuated by sharp declines and recoveries. In fact, we looked back through 100 years of data and the annual growth rate of the US stock market has been around 8% including dividends. Based on the last 50 years of data, the US market has grown at a rate of 10% including reinvested dividends whereas the rest of the world came in at around 8% comparatively. In conclusion, not only does it not pay to be bearish, it certainly does not pay to bet against America.
  • The same amount of money buys more units of equities when markets are lower and less when they are higher. Therefore, as markets ebb and flow, you end up taking advantage of market weakness by buying more whenever it is cheaper.
More