After a Record Year for Stocks, What Should Investors Do in 2018?

For many of us, the New Year brings about time for both reflection and thoughts of the future. As 2017 is now in the books, we’d like to take the opportunity to share some insight into how we viewed the year from an investment standpoint, and share some thoughts for 2018.

It was a record year in many ways for the stock market

For the first time, U.S. stocks posted positive returns in each calendar month of 2017. The Dow Jones Industrial Average hit a new record high 71 times throughout the year. The most unusual aspect of 2017 was the low amount of volatility and minimal drops in the stock market that occurred. On average, U.S. stocks have fallen about 14% each year, whereas the largest pullback experienced during 2017 was less than 3%.

When looking at returns across the various investment types, all of them performed well during the year. Stocks outside the U.S. did best, with emerging markets up over 37%, and foreign stocks from developed economies increased over 25%. U.S. stocks finished up almost 22%, and bonds returned 3.5% for the year.

What’s on tap for 2018?

We’d expect more volatility and a larger pullback than we experienced last year. The global economy continues to gain strength, corporate earnings remain supportive of stock prices, and tax reform has infused new optimism into the market. Uncertainty with investing never goes away, however, and there are numerous risks in the short term.Otherwise, we won’t venture to guess where the market takes us in 2018.

This is the time of year when investment “experts” are eager to give out their predictions for the calendar year, often suggesting getting into or out of stocks with some rationale to make their case either way. It’s understandable that investors may be lost on what to do next with the amount of conflicting information out there.

The investment community seems to universally accept that trying to time the market will ultimately lead to failure, but that doesn’t appear to stop a lot of people from trying to do so anyway.

The investor wanting to get out of the market to avoid a pullback must consider a couple things. First, just because the market is at all-time highs doesn’t mean it can’t go higher. U.S. stocks have been hitting all-time highs since 2013 for a number of reasons and have caused more than a few investors to jump ship along the way. Second, the probability of being a successful market-timer over time is stacked against you. Getting a market call right means you must make two correct decisions – when to get out, and when to get back in. If an investor has a 50% chance of being right with each decision, then s/he has about a 1 in 4 chance of being better off overall. Even if you’re lucky and guess right 70% of the time, your chances are basically no better than a coin flip.

The reality is that no one can predict what the market will bring, this year or the next. We continue to believe that the more successful investors are the ones who stick with a long-term plan rather than reacting to predictions or the short-term movements of the market.

Ultimately, most investors will have funding goals that span years or even decades beyond 2018, so we recommend maintaining that long-term focus in order to give your retirement plan the best odds for success. We will continue to monitor the markets, the economy, and your portfolio to ensure that you stay on track to meet your long-term goals.