2018: An Uneventful Year for Asset Class Returns

Contrary to what you might have read in the papers, 2018 was a pretty uneventful year for the UK stock market – and indeed, the global market as a whole.

While the financial media appears to be up in arms about the negative return experienced by most major stock market indices in the past year, this sort of temporary decline should be expected, and dare I say welcomed?

Historical data shows that, over the last 100 years, UK Equity ended with a negative return in around one in four calendar years. (This is also true for US and global stock markets.)

The chart below is a histogram showing the range of annual return since 1900 in bands of 10%. Of the 119 years shown on this chart, UK stock markets delivered a negative return in 23 calendar years. Most of those 23 years of negative return saw the equity markets falling by up to 20%. There are a few years with losses of more than 20% but alas, there are three times as many years with gains of more than 20% a year. The odds of an exceptionally high return is way more than the odds of an exceptionally low return in any one year.

And since the global financial crisis ended 10 years ago, UK Equity has ended with a positive return every year – with the exception of 2011. So, after six consecutive years of positive return, a ‘correction’ is long overdue. And in 2018, the equity markets did just that.

Not only is this latest decline well within our range of expectations in terms of frequency, but the magnitude of the loss is also well within historical bounds. The 2018 return of -9.5% is firmly within our range of expected return in any single year, which is somewhere between -52% and 151%. This is the historical range of return for UK Equities since 1900. No crystal ball is required to assert that future return in any one year will most likely fall somewhere in that ballpark 🙂
We know that every so often, the gods of equities test our resolve by clawing back some of the return previously bestowed upon us, lest we get complacent or arrogant. Why then, is the financial media crapping their pants, because the gods of equities visited us in 2018 with the occasional decline, just like they’ve always done?
We also know that if we stay invested, unlike the speculators who sell out in panic during these declines, our patience is often rewarded with a return greater in magnitude than the decline. This has happened in virtually all major equity markets in the last century, with the exception of Russia and China when the communists took over, and in Japan following World War Two.
With the exception of cash, cumulative return remains well in excess of inflation for mainstream asset classes over the last 10, 15 and 20 years. Remind me again what all the hoo-ha is about?
So what do we do now? Do we listen to the sirens, sell out of equities in panic and sit in cash waiting for the bottom? Nah, they don’t ring a bell at the bottom. Shall we now worship at the altar of those who swear to manage volatility? Nay, for volatility isn’t risk, it’s the stuff equity returns are made of. The price for equity returns is paid in volatility.
What we do is sit on our hands, thank the gods of equities for blessing us bountifully in the past decade and embrace the latest decline with open arms, in full confidence that this too shall pass just like the ones before it.
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Abraham Okusanya
Abraham is the founder of FinalytiQ, a research consultancy for platforms, asset managers, and advisory firms. Recognised as one of the country’s leading experts in retirement income, platforms and investment propositions, Abraham has authored several papers on these subjects and delivered talks to the Personal Finance Society, The FCA and several conferences across the country.

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