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A pickup truck and an Italian sports car are both automobiles, but you wouldn't judge their performance on the same attributes: Pickups are for versatility, durability and longevity, while sports cars are for speed and agility. And so, you evaluate each vehicle through the lens of your needs. The same goes for your investments.
The stock market spent a good portion of 2018 ascending to new highs. These rallies raise the tendency for investors to ask, "Shouldn’t my portfolio also be setting record highs?" Stocks experienced two 10% pullbacks this year, the first calendar year to contain two market corrections in more than a decade. It's in those periods when investors prefer portfolios that don't resemble the market.
So as you evaluate your investment performance, consider the following:
1. Things change over time.
In 1982, the Dow included Sears Roebuck & Company, Eastman Kodak and Goodyear Tire and Rubber. Today there's Boeing, Nike and Apple. The index's makeup has changed with the economy over the last century; over time, your portfolio should also evolve along with your personal situation. Adjustments to your goals, time horizon and comfort with risk will influence necessary changes in the composition of your investments. As a result, you should anticipate the fluctuations and potential returns of your portfolio to evolve over time.
2. Performance isn't just gains.
Maximizing gains is not the sole objective of a sound financial strategy. Building a more balanced investment mix is intended to protect against downside as well, so performance should be evaluated by the combination of return and risk. As the table shows, over the past two cycles, a balanced portfolio trailed during bull markets but experienced significantly less downside in bear markets. A portfolio of 65% stocks and 35% bonds, measured over rolling 10-year periods, has experienced no negative returns in more than half a century.
Source: Edward Jones calculations. Stock market measured by the total return of the S&P 500 index. Balanced portfolio measured by 65% stocks (S&P 500) and 35% bonds (Barclays U.S. Aggregate bond index) rebalanced annually. Periods: 3/23/00-10/9/02, 10/9/02-10/9/07, 10/9/07-03/9/09, 3/9/09-12/31/17, 12/31/2017-10/31/2018, 3/23/00-10/31/2018.
3. Expectations are important.
Seeking higher returns from low-risk investments or chasing gains in investments that are riskier than you're comfortable with can result in disappointment.
Make sure your expectations for your portfolio are:
4. Use an appropriate time frame.
Your financial goals are longer-term – you should evaluate your progress toward them with the same perspective. Over the past 40 years, when evaluated monthly, the stock market was positive just 64% of the time. But by evaluating it over 10-year time frames, performance was positive 94% of the time.* Just this year, stocks posted historically strong gains in January and in the third quarter, while each of those periods was followed by notable pullbacks. Your performance should be looked at over broader periods of time and measured against the progress toward your goals.
5. Don't forget about diversification.
In 2018, the U.S. stock market delivered stronger gains in the January and midyear rallies, but fell by an average of 9.5% during the February and October pullbacks, whereas bonds and international stocks performed better in those periods. Over the last 10 years, there have been nine different asset classes in the top two spots for annual performance and seven different asset classes within the bottom two annual performers. Simply put, leadership rotates.
6. You can't control the market, but you can control your actions.
We think economic and earnings growth will continue in 2019, making short-term pullbacks an opportunity to add to quality investments at lower prices, potentially helping your portfolio's return.
We believe the combination of positive economic growth, rising corporate profits and still-low interest rates sets the stage for the bull market to continue in 2019. However, risks are more prevalent, meaning market fluctuations will likely be more prominent along the way.
To stay on track in this environment, we recommend:
As a long-term investor, you generally don't own the stock market. Instead, you own a portfolio that is personalized to your situation. So your objective is not to match the market, but instead to navigate the terrain and stay on track toward your destination.
*Source: Morningstar Direct, 1/1/1976 - 9/30/2018. 100% stocks represented by the S&P 500 Total Return Index. Past performance is not a guarantee of what will happen in the future.