Investment wise, 2017 was as calm as a mill pond.
The stock market did not crash. There was no zombie apocalypse to speak of and The World continued a 4 billion year lucky streak by not ending.
My stock picks delivered 13.5%…just beating the FTSE All Share index which gave a total return of 13.1%. 13.5% was actually a shade below my past results which are currently running at 14% annualised over the last 21 years. If you start with £1m and grow it at 14% per year that turns into £15.7m over 21 years. Unfortunately, I started with nothing.
13.5% is not bad but under-performed a simple Vanguard S&P 500 tracker fund which in 2017 delivered ~21.8% in $ terms (with a lot less work). This is a handy reminder that you can do well even if you know nothing about investing.
If history is anything to go by, these returns are probably too good to last forever.
We’ve had some warning signs. I’ve been writing about the US market looking pricey for a couple of years now. GMO Investment Management are now forecasting losses over the next 7 years for all mainstream asset classes other than emerging market shares.
And don’t get me started on the whole crypto-currency thing (which seems to have a similar effect on males under 30 to fast broadband plus internet porn). Did these guys not read Day Trading : Frankie Goes to Vegas???
Its also interesting that in 2017, the stock market trounced UK property prices with the FTSE All Share delivering a ~10% capital increase which compares to 2.7% for UK housing according to The Halifax. Could it be that, after the Brexit vote, the air is slowly coming out of the tyres of the UK housing market?
Contrary to folk stories that say “you can’t go wrong with property” the housing market and the stock market are both prone to crashes. Its just that these crashes look different. In a housing market downturn, prices are “sticky” and slow to adjust downwards as sellers resist price cuts. Transactions dry up, people stay put and it can take years for prices to adjust fully and the market to function normally again.
Much of the adjustment happens via inflation. In other words, house prices flatline for several years whilst inflation cuts those prices in real terms. The last proper UK housing crash was in 1990 and it took over 5 years for the market to clear and normalise.
Maybe we’re at the start of a 5 – 10 year property crash? If interest rates went back up to the 17% they reached in 1981, that would be very likely. But even if interest rates are held down, a long drawn out property slump is possible. Who knows? You can’t predict, but you can prepare.
Its an old stock market saying that the market climbs up the stairs and goes down the escalator. In other words, prices adjust downward quickly and could easily fall by say 30% in a week (e.g. October 1987) to restore the balance between buyers and sellers. The process is much shorter and sharper and therefore much more visible in the stock market vs the housing market. Plus the media know this scares people and keeps them hooked on their news product. So stock market crashes get a load of attention. Another reason why no news is good news.
We want to avoid the rookie mistake of failing to expect market crashes (which are a normal part of the process). Like a clown, The Escape Artist has failed at this in the past, having cracked in the 2000-03 bear market and sold right at the very bottom….doh!
Its easy to invest effectively as long as you never panic sell during market crashes. There is no more important message than this in investing.
The Escape Artist has told you this before but I can’t be sure you were all really listening. Now is as good a time as any to get The Godfather of Financial Independence back to drum the message into us all.
So today, I’m featuring an extract from JL Collins excellent book The Simple Path to Wealth to remind us that we need to toughen up to be good investors (as well as cutting our spending on donuts & soft furnishings and using our legs etc etc).
You could probably fill an entire underground parking garage with all the books that have been written on the subject of investing alone…the problem is that most of those books are boring and you end up setting them down with a bookmark somewhere around page 25, never to return.
JL Collins takes this old style of investment book writing and disregards it completely. He lights up the campfire and and just starts telling stories, and if those stories just happen to be about exactly what you wanted to learn about in the first place, your new knowledge is a happy side effect.
Although very few people actually follow it, I have found that the road to a wealthy life really is simple and enjoyable to follow, so it only makes sense that a book about it should have those same fine traits. This one does.
So how should we deal with the coming market crash if we are invested in shares? Here’s JL Collins:
Pundits and professors say “treat the symptoms” of volatility.
They default to broad asset allocation. They would have us invest in everything and hope a couple of those puppies pull through.
To do this properly would require a ton of work. You would need to understand all the various asset classes, decide what percentage to hold of each and choose how to own them. Once you did that you’d need to track them rebalancing as necessary.
The result of all this effort is to guarantee sub-par performance over time while offering the slim hope of increased security. I am reminded of the quote: “Those who would trade liberty for security deserve neither“.
Toughen up cupcake…
…and cure your bad behaviour.
This means you must recognise the counterproductive pyschology that causes bad investment decisions – such as panic selling – and correct it in yourself. In doing so, your investments will be far simpler and your results far stronger.
To start you need to understand a few things about the stock market:
1. Market crashes are to be expected
What happened in 2008 was not something unheard off. It has happened before and it will happen again. And again. In the 40 odd years I’ve been investing we’ve had:
- the great recession of 1974-75
- the massive inflation of the early 1980s when mortgage rates were pushing 20%
- the crash of 1987 (~30% fall in a week)
- the tech crash of 2000-03
2. The market always recovers
Always. And, if someday it doesn’t, no investment will be safe and none of this financial stuff will matter anyway. In 1974 the Dow closed at 616. At the end of 2014 it was 17,823. An impressive result through all the disasters.
All you would have had to do was toughen up and let it ride. Take a moment and let that sink in.
Everybody makes money when the market is rising. But what determines whether it will make you wealthy or leave you bleeding on the side of the road is what you do during the times it is collapsing.
3. The market always goes up
Understand that this is not to say it is a smooth ride.
It’s not. It is most often a wild and rocky road.
But it always goes up. Not every year. Not every month. not every week and certainly not every day.
But take a look at a chart of the US stock market 1900 – 2012. The trend is relentlessly, through disaster after disaster, up.
4. The stock market is the best performing investment class over time
5. The future will have as many collapses, recessions and disasters as the past
Its not possible to prevent them. Every time this happens your investments will take a hit. Every time it will be as scary as hell. Every time all the smart guys will be screaming: Sell!! And every time only those few with enough nerve will stay the course and prosper.
This is why you have to toughen up, learn to ignore the noise and ride out the storm; adding still more money to your investments as you go.
To be strong enough to stay the course you need to know these bad things are coming – not only intellectually but on an emotional level as well. You need to know this deep in your gut. They will happen. They will hurt. But like blizzards in winter they should never be a surprise [TEA: South West Trains please take note]. And unless you panic, they won’t matter.
There’s a major market crash coming!! And there’ll be another after that!! What wonderful buying opportunities they’ll be.
I tell my 24 year old that during her 60-70 odd years of being an investor, she can expect to see 2008 level financial meltdowns every 25 years or so. That’s 2 – 3 of these economic “end of the world” events coming her (and your) way. Smaller collapses will occur even more often.
The thing is, they are never the end of the world. They are part of the process. So is all the panic that surrounds them. Don’t worry. The world isn’t going to end on our watch. It is hubris to think it will.
Of course, over those same years she’s going to see several major bull markets as well. Some will rage beyond all reason, along with the hype that will surround them. When those occur, the financial media will declare “this time it’s different” with all the same confidence as when they claimed the end had come. In this too they will be wrong.
But yer gonna have to be tough.