Throughout 2018, volatility in the U.S. stock market caused some people to ask whether it was different this time. With breaking news regularly flashing across phones and TV screens, many found it difficult not to be drawn in to see what would happen next.

Investing for the long term is often compared to running a marathon. Disciplined runners do not abandon the course after a single bad stretch just as so many investors have achieved their financial goals by being globally diversified despite short-term fluctuations.

That said, it may not have been an easy year to feel good about being invested in a portfolio diversified across global stocks and bonds. Through the first nine months of the year, both bonds and international stocks had underperformed U.S. stocks by more than 12%.¹

However, during the last three months of 2018, we were reminded why we hold a diversified portfolio. While the well-known S&P 500 Index fell 13.5% and the NASDAQ Composite Index fell 17.3%, many asset classes weathered the storm. Asset classes such as long-term U.S. Treasury securities were up 4.2%, U.S. aggregate bonds were up 1.6% with global real estate down 5.8% and emerging markets stocks down 7.5%.²

In the last two weeks of December, the S&P 500 continued to lose value. For 2018, U.S. markets (as proxied by the S&P 500) ended down 4.4%. By contrast, a diversified portfolio (as proxied by the DFA Global Equity Portfolio) ended down 11.5%. While we saw significant declines, these types of corrections are expected. To provide some perspective, a 20% correction has occurred on average once every 3.5 years.³

 

Staying Invested for the Long Term

It is precisely during periods like these that we step forward to take a long-term perspective. If we think back just one year to 2017, diversified investors cheered the benefits of diversification in a banner year. International stocks delivered a remarkable 27.2%, U.S. stocks delivered 21.8% and bonds delivered 3.5%.⁴

Even with such numbers in recent memory, the economic and geopolitical news that dominated headlines in 2018 increased uncertainty. When uncertainty increases, markets demand higher future returns for risky assets, meaning those assets need to have lower prices today. The most important thing to do as a long-term investor is be there when the upside happens. If history is any indicator, the upside can happen fast.⁵

 

Cumulative Return of S&P 500 During and After Major Down Markets6
Quarter Ending	Quarterly Performance	One Year	Three Years
September 1974	–25.2%	38.1%	72.7%
December 1987	–22.6%	16.8%	48.8%
December 2008	–21.9%	26.5%	48.6%
June 1962	–20.6%	31.2%	69.2%
September 1946	–18.0%	6.5%	24.5%
June 1970	–18.0%	41.9%	57.4%
September 2002	–17.3%	0.3%	27.0%
Averages	–20.5%	23.0%	49.7%

 

 

Sources

¹ Bonds as proxied by the Bloomberg Barclays U.S. Aggregate Bond Index, international stocks as proxied by the MSCI All Country World ex USA Index (net div.), U.S. stocks as proxied by the S&P 500 Index.

² Long-term U.S. Treasury securities as proxied by the Bloomberg Barclays U.S. Treasury Bond Index Long, U.S. aggregate bonds as proxied by Bloomberg Barclays U.S. Aggregate Bond Index, global real estate as proxied by S&P Global REIT Index (net div.), emerging markets stocks as proxied by the MSCI Emerging Markets Index (net div.).

³ Tim Mullaney, “8 Things You Need to Know About Bear Markets.” CNBC, August 24, 2015.

⁴ International stocks as proxied by the MSCI All Country ex USA Index (net div.), U.S. stocks as proxied by the S&P 500 Index, bonds as proxied by the Bloomberg Barclays U.S. Aggregate Bond Index.

⁵ Ben Carlson, “Buying When Stocks Are Down Big.” A Wealth of Common Sense, December 23, 2018.

⁶ Ibid.

 

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