Picking good investments is important but perhaps represents just 20% of the puzzle. Learning how to hold onto the darn things, regardless of what the market throws at you, is arguably the other 80%.
Context helps a lot I find, so when the market does swan dive I like to step back and put it into perspective.
For example, while 2018 has certainly seemed like a pretty scary year, with two sizeable market setbacks in January to March and October to December*, thanks to a small decline in the pound, world markets have basically been flat for UK investors.
* So far at least. Who knows when the current drop will peter out!
A lot of people highlight the arbitrary nature of analysing returns by calendar years. I can see their point but I do find it a useful exercise. Quarterly is too frequent and a few years seems too long. The middle bowl of porridge – an annual check-up – seems about right to me.
As Carl Richards often says, course corrections are inevitable when it comes to investment plans, so monitoring progress is crucial. I certainly find that my own investing plan needs frequent tweaking!
UK stock markets in 2018
As around 30% of my portfolio is in the UK, how the London market has performed is a key driver of my returns. Here’s how the UK has done up to 7th December and it’s not a pretty picture:
| Index | % change |
|---|---|
| FTSE All-Share | -8.7 |
| FTSE 100 | -8.2 |
| FTSE 250 ex Inv Trust | -13.5 |
| FTSE All-Small ex Inv Trust | -12.4 |
These returns are on a total return basis, which adds 3.4% to the overall performance. On a price only basis, the basic indices you see quoted most widely, the UK market was down by about 12%.
It helps to remember that 10% drops aren’t that uncommon, happening once every year or so on average. We’ve had two pretty close together, which is a little bit more unusual, although I suspect many people have already forgotten the first one!
This year, it’s been mid and small caps taking a heavier hit. As they tend to be more focused on the domestic economy, that’s not too surprising.
Global returns so far in 2018
Spreading the net wider, here’s how major markets have performed in pound terms. Russia leads the way and Germany props up the table.
| Region/country | % change in £ terms |
|---|---|
| Russia | 13.8 |
| US | 6.2 |
| Brazil | 5.7 |
| Developed | 0.9 |
| Global | -0.3 |
| Japan | -2.9 |
| Global Small Cap | -3.6 |
| Australia | -4.6 |
| Canada | -5.0 |
| Asia Pacific | -5.7 |
| Global ex-US | -6.4 |
| Emerging | -6.7 |
| India | -6.7 |
| Europe | -7.4 |
| UK | -8.6 |
| China | -10.6 |
| Germany | -14.7 |
The huge impact of the US can be seen here. Strip it out and global indices declined by 6.4%.
Interestingly, emerging markets have performed about the same as other non-US markets, albeit with a wide variation within that. Russia and Brazil have done well, while China has had a very poor year.
If we were to look at the same table in US dollars, everything shifts down 6% or so. The US market is basically flat in dollar terms and the global market down nearly 7%.
The ever-sinking pound?
To digress momentarily, I must admit to not spending a lot of time thinking about currencies when investing, usually taking the view that most movements come out in the wash.
Yet it’s remarkable to think that the pounds spent quite a few years before the financial crisis at the $1.80 to $2.00 level. $1.40 appeared to be the ‘new normal’ in recent years, before the downshift to $1.25-$1.30 after the Referendum.
Looking at this chart of the pound against a basket of our main trading partners, you can see that sterling has lost around 1.4% a year over the last 35 years. It’s lurched downwards at various points, rather than being a gradual decline.
As an investor who spends mostly in pounds, I don’t think there’s much of an action point here for me, other than a reminder of the importance of investing globally.
How I’ve done in 2018
My main portfolio was down 2.1% for the year as of Friday, so that’s pretty much what the indices would suggest given my 30% UK weighting. I’m perhaps ahead by 0.5%, but that’s basically a daily movement so meaningless in my view.
My pension, smaller and mostly invested in Fundsmith and Lindsell Train Global, is up around 11%. I’m very pleased with that, although the irony that my best performers this year have not been investment trusts is not lost on me!
Do I need any ‘course corrections’? For me, there are two basic considerations when I do these sort of reviews. The first is do I tweak my underlying investments, while the second is whether active investing continues to be a worthwhile pursuit.
On the first aspect, nothing leaps out at me for the moment. I’ve made a few shifts to my portfolio in the last 18 months or so, boosting my small-cap exposure at one end and adding more on an income focus at the other. I feel I need to let that play out a little before tinkering too much.
As for the passive question, I’m still happy with my overall performance. My long-term challenge of keeping my nose ahead of the market looks set to continue for a little while longer.