We have no idea what’s going to happen in world events, politics, or the market in 2018 (and neither does anyone else). There’s no way to reduce the uncertainty about the future or know exactly what it holds but I am fairly certain that the following 5 things will happen to investors in 2018:
1. Something will happen that does not make any sense at all. There’s sure to be something that catches investors’ off-guard in 2018. Something is bound to defy expectations whether it involves geopolitics, irrational market movements, corporate takeovers, huge gainers, huge losers, or any number of crazy news, events, or performance. I’ve learned I’ll almost always be surprised by markets to some degree so the trick is to not be surprised that you’re surprised because these things can be extremely random.
2. When investments start to fall a little, it will be easy to convince yourself that they’ll fall much further. The average peak-to-trough drawdown in stocks over the past 70 years or so is a loss of 13-14% in a given calendar year. We saw nothing close to approaching this type of drawdown in 2017 but eventually, we’ll see a correction. Crashes are rare in comparison to corrections but it’s almost impossible to avoid thinking every correction will turn into a crash.
3. Your asset allocation will likely have a bigger impact on your performance than your security selection. Stock-picking is more exciting but even if you pick the very best stocks in the worst sector/country/region/risk factor it probably won’t matter in terms of your overall performance. Asset allocation isn’t as sexy as security selection but it will almost always be the most significant part of your performance attribution. An example would be to be overweight U.S equities over Canadian for the past 10 years. The S&P500 is up an average of 8% in Canadian dollars over the past 10 years compared to the TSX which is only up 2.22%.
4. There will be a stock, fund, strategy, or asset class that skyrockets that you wish you owned more of. Every year there’s something everyone wishes they would have put their entire portfolio in to see huge gains. Its fun to dream about owning a lottery ticket stock but you’ll only know in hindsight what the perfect portfolio will be
5. Diversification will make you feel silly. Any long-term investment strategy is bound to make you feel foolish over the short-term. This is especially true at market extremes as the limits of your patience and discipline are sure to be tested. Diversification is for patient people and that requires ignoring those market environments that make you feel like an idiot for spreading your bets and managing risk.
Kyle Sarai, MBA
RBC Wealth Management