Let's hear it for 2019!
Major stock indices in the United States and overseas are poised to deliver double-digit gains for the year. Even with uncertainty about Britain's exit from the European Union (EU), the FTSE 100 boasted a gain of more than 10 percent at the end of last week. That's not bad for a year which included (in the United States) an inverted yield curve, an earnings recession, and a contentious trade war.
The strong stock market performance of 2019 owes a lot to central banks, and so does the performance of the bond market. Reuters reported,
"...the screeching change of direction by the world's top central banks, led by the Federal Reserve, which cut U.S. interest rates for the first time since the financial crisis more than a decade earlier...fired bond markets up like a rocket. U.S. Treasuries, the world's benchmark government IOU, have made a whopping 9.4 percent after yields plunged as much as 120 basis points...German Bunds - Europe's safest asset - have had their best year in five years, making roughly 5.5% in euro terms as the European Central Bank has reversed course too."
So, what lessons should we take from 2019?
Perhaps, we should try to come to terms with loss aversion. When you make an investment decision, it's important to consider the impact of loss aversion on your thinking. The pain from a loss carries twice the impact of the pleasure from a gain. As a result, fear of loss may affect investment decision making.
2019 offered a great example. During a year of exceptional returns, investors pulled money out of stocks at a record pace because they were worried about recession and other issues. Axios reported,
"Data from the Investment Company Institute shows money has been pulled out of [stock investments] in every month this year except January. In total, more than $130 billion has been drawn from [stock investments] in 2019, making it already the largest year of outflows on record."
When it comes to investing, uncertainty is normal. It is part of investing. Tolerating uncertainty may help investors earn attractive returns. As a result, our advice is to stay invested even when uncertainty makes you nervous, even when markets are falling.
If you have a diversified portfolio built to help you reach your goals, stay with it, unless your risk tolerance has changed. In 2019, pulling money out of stocks meant some investors missed out on some exceptional returns.
