What a difference a quarter makes! The first quarter of 2019 erased most, and in some cases, all of the negative returns from Q4 of 2018. I'm happy to offer a brief market review of a fabulous start to 2019.
The last quarter of 2018 brought back the nervousness that’s been missing for much of the last decade. It was one of the largest quarterly declines during that time. For many, it brought back memories of 2008. For newer investors, it was their first real taste of negative returns.
It was interesting to watch some of the hand wringings from newer investors experiencing downturns like this for the first time. I warned about this in an article asking whether people were emotionally ready for a market meltdown. This wasn't close to a meltdown but a lot of people got upset.
Those days quickly disappeared in the first quarter of 2019.
Below are the index returns from selected markets around the globe.
|Index||Q4 2018 Return||2018 Return||Q1 2019|
|US Stocks (Russell 3000)||-14.26%||-5.43%||13.88%|
|US Small Value (Russell 2000)||-20.29%||-11.12%||14.58%|
|International Stocks (MSCI EAFE)||-12.54%||-13.79%||9.98%|
|Emerging Markets (MSCI Emerging Mkts)||-7.63%||-15.31%||9.88%|
|US Bond Market (Barclays US Aggregate Bond)||1.64%||0.01%||2.94%|
|US Real Estate (Dow Jones US Select REIT)||-7.16%||-4.22%||15.72%|
Personally, I’d rather see a more subdued recovery. Unfortunately, no one asked me. These returns represent the rapid movements in both directions that reflect today’s markets. The same thing happened in the opposite direction last quarter. It proves that behavioral finance theory of loss aversion is alive and well. Some studies have shown that avoiding losses is twice as powerful as achieving gains.
The other behavioral finance theory that has been prevalent in the past ten years is recency bias. Recency bias causes us to remember things that have happened more recently and forget about those that happened further in the past. The last ten years have offered the best cumulative returns in U.S. market history. Recency bias suggests that our tendency is to forget the past negative returns (2008 financial crisis) and assume these returns represent the new normal.
Q4 of 2018 was a great reminder of what can happen in the markets.
Q1 2019 was, by any measurement, a fantastic quarter. Not to throw cold water on it but the same can happen in the other direction (see Q4 2018). It’s best to stay focused on our long-term goals and how the portfolios help us achieve them.
It's impossible to predict what will happen to the markets in the future. Lots of people try. No one gets it right consistently. Stick with your plan. Stay invested. Rebalance your portfolio as needed. And the most important thing – turn off the financial news!
Now it's your turn. How did you do in Q4 2018? Were you shaken by the downturn? Did you stay put or even invest more? I'd love to hear from you.
Fred started the blog Money with a Purpose in October 2017. The blog focused on three primary areas: Personal Finance, Overcoming Adversity, and Lifestyle. During his time at Money with a Purpose, he was quoted in Forbes, USA Today and appeared in Money Magazine, MarketWatch, The Good Men Project, Thrive Global and many other publications.
In April 2019, Fred, along with two other partners, acquired The Money Mix website. To focus his time and energy where he could be the most productive, Fred recently merged Money with a Purpose with The Money Mix. You can now find all of his great content right here on The Money Mix, along with content from some of the brightest minds in personal finance.