Each year around this time, many Americans engage in a traditional process of self-improvement by making New Year’s resolutions. The New Year is also a busy time for financial advisors, many of whom will be meeting with clients to review accounts and update strategies for the coming year. The stock market volatility we witnessed in 2018 should be a featured conversation at every meeting.
With this in mind, many advisors will be “resolving” to make risk management a priority in their portfolio design this year. Risk should always be front and center, and there’s no time like the present to help your clients better understand the risks in their portfolios. A recent survey by Natixis Global Asset Management indicated that three-quarters (76%) of investors admit that they don’t have a solid understanding of risk. It’s important to impress upon clients that they can’t have return without investment risk, and that risk is actually a more predictable variable in a portfolio than return over time. Putting risk first in portfolio design can provide a more stable foundation as clients pursue their goals. Conducting periodic risk “audits” can help determine whether they are taking on too much or too little risk along the way.
A study on New Year’s resolutions found that one of the top ten promises Americans make each year is to help others reach their dreams. Advisors who follow through on helping their clients better understand risk can put a check mark next to that pledge for themselves.
After a relatively calm November, December delivered a wallop to the markets. Trade concerns with China, interest rate hikes, and weakening corporate earnings were just some of the factors that led to the dramatic volatility and downside movements in equities for the month. Just to put things into perspective, consider the following:
- The S&P 500 had it’s worst December since 1931, and the Nasdaq its worst on record
- The S&P 500 experienced 10 days of change in excess of 1% - up or down. Historically, the average month experiences just 3 such days
- Mutual funds invested in equity and bonds lost a record $152 billion for the month
The numbers were not pretty, with all the three major US equity indexes losing more than 8% for the month, and Small Caps (Russell 2000) faring even worse, losing 11.9%. December’s carnage drove the major equity indexes into bear market territory. Even as the markets have bounced back the last few weeks, they remain well below their September highs.
For the year, major equity indexes experienced negative returns for the first time since 2008. The S&P 500 ended the year down 4.4%, Small Caps (IWM) and Mid Caps (IJH) fared much worse, falling 11.1% and 11.2% respectively. Of the 11 S&P 500 equity sectors, just 3 finished the year in the green – Healthcare, Utilities and Consumer Discretionary. Five lost more than 10% with Energy losing the most at 18.1%.