2018, the year of the challenge….
Charlie Bilello, the Director of Research at Pension Partners (PensionPartners.com) had an excellent blog article pointing out 2018 was one of those rare years where there was no place to hide an investor.
Every asset class was negative…except cash. The next closest year to something akin to 2018 was 2008…when 15 asset classes tracked, only gold, cash and US bonds were positive. 2018 did not even give us this kind of small win.
Many investors point to the “crazy” volatility of the 2018 market and want to lay blame there…well, it was 17% and average since 1928 is 16.3%. Hardly crazy by historic average. The long bull market of 2009-2017 had lulled investors into a “new normal.” Not realizing the crazy part was actually the lack of volatility, and there is no “new normal.”
For long term investors, volatility is part of the price you pay to participate in the equity markets.
So, do we abandon diversification as an investment strategy?
No, looking back since 2008, in only 3 of the 10 years tracked did the number of asset classes with negative returns outnumber those with positive returns. So, in those few years, those minority, but positive asset classes, helped mitigate the portfolio total draw down.
As Ray Dalio said (founder of the world’s largest hedge fund, and the hedge fund with the #1 return in 2018), “the only free lunch in investing is diversification.”
Dave + Drew