We are now in an upward market streak in which the Dow Jones Industrial Average of large, U.S. companies has risen for the most straight weeks since November 2017.
This follows a stomach-churning December, in which the losses for the DJIA and the Standard and Poors 500 Index were the worst December performance for the market since 1931. The government shutdown, reduced growth numbers for Germany and Italy, and the trade war between the U.S. and China made many investors nervous. In that month alone, the Dow lost 9%, and the S&P 500 lost 8.5%.¹
Last year, some investors began to worry that we were heading into a major bear market plunge. This was despite the facts — the economy was not collapsing, companies were not going out of business, and employment numbers were strong.
This year’s rebound came from the Federal Reserve Bank expressing more caution about raising interest rates in 2019. It was helped along by average investors’ continued faith in the U.S. economy. When regular investors got back into the market, it triggered computerized trading algorithms to jump back in too. This January was the best month for the DJIA since October 2015, hitting a 2-month high on February 5.² It’s a sign of how the market can bounce back even in the face of harsh uncertainties.
So far, the S&P 500 is up 8.7% for the year. Those who reacted emotionally last year to market fear and sold out their investments at the end of the 2018 missed out on this rally.
The moral of the story is that you shouldn’t judge success on a monthly or even quarterly basis. From day to day, month to month, and year to year, past returns do not tell us much about what’s around the bend in the future. Rather than trying to time the market, broad, global diversification may allow you to capture the upside while providing greater downside protection. Large U.S. companies took the biggest hit last December. However, if you had a globally-diversified portfolio, other asset classes in your portfolio did well during this time — small U.S. companies, value strategies (where you look for bargains and buy when the market is down), emerging markets like China and India, and short-term bonds.³ Balancing these different asset classes can reduce some of the volatility and help give you the peace of mind to not abandon your investment strategy.
Author Dan Roam, in his upcoming book “27 Principles Every Investor Should Know”, explains this principle in a way everyone can understand. He points out that these days, couples who are both age 65 can expect to spend 25 to 30 years in retirement. Investing for this long stretch of time, he explains, is like roasting a 20-pound turkey. You know it’s going to take 4 to 5 hours. You can’t measure success by opening the oven every couple of minutes to see how it’s going.
Your gut and emotions will still be calling out to you, but a diversified investment approach may strengthen your resolve to stick to your plan and accomplish your long-term goals.
¹ Fox Business 12/31/2018
² Wall Street Journal 2/11/2019