Let's Look Back At 2018
Even if you don’t follow the stock markets too closely, I’m sure you already know that 2018 was a pretty terrible year for the markets. It was pretty difficult to avoid hearing about the markets, both good and bad. It seemed like almost everyday there was something on the hourly CBC Radio news about the markets or something that was going to influence them in the short term. Whether it was US threatening China with trade wars, NAFTA agreements stalling, looming recessions of foreign countries or interest rate changes, stock market variables were a constant throughout the year.
2018 began at the very end of one of the longest and most prosperous bull runs in recent memory, and with it came the collapse of some large market bubbles
Let’s back it up for a minute so I can explain something that you may know already. When markets are generally increasing in value, producing positive returns, it is referred to as a Bull Market. A Bear Market is the opposite, when markets are generally decreasing in value and producing negative returns. Over time markets have increased in value, of course there are down years, but for every down year there’s typically eight or so positive years. Over time markets generally increase in value, economies grow and expand, this is what makes investing investing work and compound interest so valuable.
If we take a look at the S&P 500, which is an index fund comprised of 500 US traded companies, the last year that produced overall negative returns was 2008, when the US housing market collapsed. So you could say the markets were sort of due for a down year based on the historical frequency. And from what I did read throughout the year, a lot of analysts were stating their opinions that 2018 would be a down year, but remember that the markets are unpredictable and no one knows what is really going to happen.
Just to show how unpredictable the markets can be, CNBC published an article on January 24th 2018 titled “ The stock market is off to its best start in 31 years and that bodes well for the rest of 2018” (full article can be found here) followed by one issued at the end of the year titled “US stocks post worst year in a decade as the S&P 500 falls more than 6% in 2018” (full article can be found here). Looking back at the year and seeing these headlines, it was hard not to chuckle. But at the same time, I couldn’t have known any better myself.
When I started managing my own investments in November 2017, I believed that the markets were in a bubble. I expected cannabis stocks to decline before picking back up prior to legalization here in Canada. And although that did happen, my timeline was quite off. It seems that with the start of 2018 cannabis stocks began their long bleed of value that eventually continued all of the way until about September when we saw a rapid increase (but in most cases nowhere near their historic highs posted in late 2017) in price before another big decline beginning the day of legalization or immediately after.
There was another bubble that had been forming for a while that saw its collapse in 2018, referring to cryptocurrency. During December of 2017 Bitcoin hit a high of $19,783.21 USD with equalled about $25,369.99 CAD (with the USD to CAD conversion rate at that time 1.2824), almost a year later is was sitting in the low $3000’s USD, for a drop of almost 85%. Now that isn’t only a huge drop, but it’s also amplified by the price, it’s a lot of money.
Full disclosure, I haven’t taken the time to fully understand how cryptocurrencies work, so I don’t dabble with them. I like the structure with traditional stock markets. Cryptocurrencies trade 24 hours a day everyday, I think I would always feel on edge. Where I like the markets are open 8:30am to 3:00pm Monday to Friday (except on holidays) and I like that, it’s nice to be able to disconnect from the markets and focus on more important things. I’d also hate the idea of having money in crypto markets, going to sleep and waking up to find I lost a ton of money. I think the only way I’d feel good about it is by day trading crypto. Maybe I’ll get around to it one day, but I’m not in any rush.
Markets overall followed a similar pattern. As the CNBC article says, January 2018 was a hot month for the S&P 500, but then cooled off suddenly and didn’t reach its January highs again until September, then dropping 20% before rebounding slightly during the Christmas holidays. It was a volatile, uncertain and unpredictable year to say the least for the S&P 500 and the rest of the major markets. It wasn’t just cannabis and crypto that saw declines, pretty much everything did.
With all of that said, with the ups and downs (but mostly downs), 2018 was a great first full year to be managing my own investments. It was a year to be able to see a lot of different things and learn from them. It was a great time to witness and learn and be able to recognize trends. For example, if I would have started investing in 2009 (as an investor you’re always wishing you started investing earlier) I would have had nothing but positive return years ahead, which would have been great for my portfolio but I don’t know if I would have learned as much as I did in this one year. Of course it’s tough to say.
Overall in 2018 my portfolio is down but I don’t believe I could be in a better spot moving forward. I made good investments, bad investments, panicked, hesitated, bought and held, day traded, momentum traded, made good calls and made bad ones too (many more bad than good). But it’s a learning process. If everything goes according to plan my portfolio should only increase overtime (with the odd down year every now and again) so this should be about the least amount of money I’ll be managing of my own. So even though I am down, it will be an insignificant amount over all, and I’d rather have a down year early and learn from it.
I guess the main point of this all is to summarize briefly what I myself saw in 2018, but I think another good point is to say that you can own shares of good companies and see your portfolio decrease. It’s referred to as Market Risk. Market Risk (also called systematic risk) is risk that effects markets overall, so diversification doesn’t eliminate it. By investing in markets you’re exposed to many types of risk. It’s important to understand risk so you can use your judgement, so I’ll have an article soon about the different types of risk that are generally associated with stock market investing.
By doing due diligence and knowing what you’re investing in you can have more confidence with your investments. Whether you’re managing your money yourself or having someone else doing it for you, it’s really worth the time to understand what you’re investing in so you can understand why you’re getting a negative return in a down year.
Until next time, happy investing and best of luck for 2019!