Taking investment lessons from 2018, a tricky year for markets

The year 2018 was a turbulent one in the markets and was a difficult year for most investors. When times are tough there are often good lessons to be learnt, however, and 2018 provided a number of these for committed investors.

Here are some key learnings to keep in mind as you consider how to approach your investments in the year ahead.

High expectations leave room for disappointment

The list of FTSE/JSE All Share Index stocks trading at more than 50% below their five-year highs runs into the 50s.

Of these, seven are trading at more than 80% less.

That is hard to come back from if you bought in at the top.

Tread carefully when it comes to over-hyped shares.

It may feel as if you are missing out in the short term, but it could save you pain in the long run.

Markets react quickly to news – and not always appropriately

If we believed the market, the mere appointment of an interim leader was enough to undo all the structural damage to the SA economy over the prior decade.

That was Ramaphoria last year. It was a perfect illustration of short-term overreaction that was in contrast with the longer-term reality.

It takes a long time to turn a company or country around, and investing based on news is not always wise.

It is far better to bear long-term valuations in mind, rather than short-term sentiment.

It is impossible to time offshore investments

The rand started 2018 off with a 20% rally, only to depreciate by more than 30% in the second half of the year.

Most investors felt less inclined to take out money at R11.50 than at R15.50 (the two extremes we saw this year).

The lesson here is that offshore investments should always be a part of a diversified strategy.

You should be working towards allocating a percentage of your portfolio offshore over time, rather than trying to time when to make large adjustments.

This will serve your long-term return better.

Proper diversification is always important

The role of diversification is to have parts of your portfolio behave differently over time, while still contributing to long-term returns.

The aim is not to improve the level of expected returns, but rather to consistently provide a more acceptable outcome – a better chance of achieving what is required – over time.

This means getting the basics right in terms of asset allocation (region, asset class and sectors).

It also means that, from time to time, you will have to live with parts of your portfolio (for example, JSE-listed equities over the past year) not performing as you’d like them to in the shorter term.

During such times it is important to stick to your long-term plan.

Mistakes are inevitable – stay humble and learn from them

Investing in shares is always accompanied by uncertainty, imperfect and incomplete information, a range of possible outcomes and inevitable mistakes along the way.

What made 2018 feel worse, was that the JSE’s return was low.

A bull market compensates for individual mistakes, but a flat market highlights them.

The important question to ask is what was learnt from these mistakes or, if they were avoided, why they were avoided – was it luck or the outcome of a considered investment process?

If it was due to process, think about how to apply this even more thoroughly in future, to further minimise mistakes.