DO BAD YEARS FOLLOW GOOD STOCK MARKET YEARS?
If 2018 was the year that there was no place to hide for investors, then 2019 was almost the polar opposite. Bonds, gold, commercial property, domestic and international shares, all in the main produced positive returns for UK investors over the past twelve months. Even sterling (following a strong end to 2019) had a reasonable year, although to those of us who were on holidays over the summer it didn’t much feel like it.
The FTSE 100 (the index of the 100 largest companies listed in London) finished the year up 17.3%; the FTSE All-Share (which includes the performance of the largest 600 companies) did a little better, returning 19.2%. After such a strong year for stocks, the natural reaction may be to assume that we are in for a disappointing year – or be tempted to reduce the risk of your portfolio to try to avoid short-term losses.
While it is true that expected future returns decline as valuations become more expensive, the data doesn’t suggest that a good year necessarily be followed by bad. The below chart shows calendar year returns for the FTSE All-Share since 1987 on the x-axis, plotted against the following twelve months’ performance. There is very little relationship between the return in one calendar year, and stock market performance over the next twelve months.
The below graph tells a similar story, albeit in a different way. Twelve month market returns do not oscillate predictably from positive to negative, a trend of positive year-on-year returns (and losses!) can remain in place for extended periods of time.
While it can be tempting to think of taking profits following a strong year, the data would suggest that markets are too unpredictable to say with any degree of certainty that we are due an immediate snap back. 2020 could be characterised by any of a major sell-off for shares, a mildly disappointing period, positive (if dull) returns or another outstanding year for equities. The future is unknown, and unknowable.
So, accepting this point, what can we do to maximise the probability of good outcome over the long run? It might sound like selling one own’s book, but maintaining our investment approach, with a strong and active valuation discipline while retaining a focus on fundamentals, will help us negotitate the idiosyncracies of markets over time. Perhaps on a more personal level, having a plan which is tailored to you is by far the most likely method of ensuring success. Stick to your plan and only make material changes when your circumstances and objectives do.