Wow. What a year 2018 has been from an investment perspective. The main theme has been a surge of volatility in the stock markets. For the long term investor, such volatilty is not a problem. In fact it presents some of those rare opportunities to pick up stocks at bargain prices. As Warren Buffett said in 2008: “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”
Indeed 2018 has a lot of similarities with 2008. Unfortunately, as back then, today investors are pulling out of the stock markets as fast as they can instead of doing the opposite. If you are striving for financial independence, lower stock prices are the best thing that can happen while you are in the asset accumulation phase.
Where is the Santa Rally?
With only one week or so to go before the end of the year and no Santa Rally in sight it looks like most investors’ portfolios will turn out a little negative for the year. Here is a snapshot of my portfolio’s performance.
As you can see, the portfolio is currently 10% off the high point in September; this is a major relief as I am now able to capitalise and obtain more units at a bargain. The only problem is not having enough spare cash to deploy.
Some of the portfolio movements can be attributed to fluctuations in the exchange rates as the portfolio is globally diversified.
The GBP has dropped in value over the past year. This not ideal as it means that foreign stocks are more expensive to buy but it also boosts the overall value of the portfolio as global stocks are worth more. This concept and impact of home bias is explored in an earlier post.
Net worth impact
The major revelation of the year for me came up when I was reviewing my net worth.
I calculate a snapshot of net worth every 3 months in-order to develop a long term trend chart. Previously, due to the relatively small size of my holdings, the trend has been only going up. However, in the first quarter of 2018 there was a drop. This is nothing to be alarmed by and here are two reasons why.
First it illustrates the magnitude of the portfolio. As your portfolio grows larger the less and less your regular savings will have an impact on net worth.
The other reason is that it can make you reconsider or reaffirm you risk tolerance. It looks like there may be another drop in the fourth quarter leading to a relatively flat annual return.
A point to note is that there was also the largest record quarterly gain in the second quarter. This too had little to do with my regular savings but was mostly a direct result of a brief market resurgence.
Ignore the noise
There are always many distractions in the media about all sorts of events going on with the world economy or politics and predictions of how they will affect investment returns. The investment industry is mostly a giant marketing machine so it is crucial to focus on the fundamentals of business rather than sensationalised articles and a get rich quick mentality.
It is never a good idea for the long term investor to diligently follow the news and even worse act on what they see. Instead, the best thing to do is to focus on a high savings rate while investing regularly into low cost index funds.
I think 2019 will be another interesting year but have absolutely no idea where the markets will go. Focus will be on the things that matter; earnings growth of business, maintaining a good savings rate and keeping an eye on dividends. Speculative return is just a distraction.