Portfolio Review – December 2018 – Negative Stock Returns

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Negative stock returns and volatility are at the forefront of the conversation lately. At the time of the last update, the monthly return for the S&P 500 was -3.62%. This month, we see an even bigger drop with a -5.32% return for the month.

Luckily, my portfolio held up a bit better as shown by the below graphic from Personal Capital.

My exposure to foreign stocks actually hurt less than domestic this month! International still had a negative return but that loss trailed the domestic counterparts. My You Index, the results of my own holdings, is still negative but was buoyed by good results in bonds and REITs. 

The rough month for domestic stocks is enough to bring the YTD results into negative territory. Once again, my own portfolio fares a bit better due to exposure to REITs and bonds. 

It’s nice to see the You Index, which represents my own holdings stay in the positives despite recent market volatility. The good results are despite terrible foreign performance and negative YTD performance from both bonds and the S&P 500. The reason for my positive performance is mainly due to my exposure to REITs as well as solid performance from my individual holdings. UNH, one of my biggest holdings is still up 21% YTD and has really held up my portfolio.

Negative stock returns are never great to see. However, from the perspective of a long term investor, these short term blips don’t matter much. We’ve had a decade of extraordinary stock returns and some reversion is definitely expected.

It’s hard to tell whether this is another short term reversion or whether this one will continue for a while. However, it’s important to remember that investing is a long term game. Lower stock prices certainly make the portfolio look worse but also allow us to buy more shares with our money. 

It’s possible we end the year with negative stock returns and it’s possible that continues into next year. However, it’s likely that eventually the stock market will start to rise again and I plan to keep buying until that happens; no matter how long it takes to get there. 

The reason I’m able to do that is that I have a healthy long term mindset, an asset allocation with a risk profile that’s in line with my risk tolerance and cash on the side in the form of an emergency fund in case something goes awry. 

It’s clear that based on my You Index, my portfolio will be lower this month. It wasn’t that long ago that I was talking about my 16 consecutive positive growth months. 

Maybe now it’s time for 16 consecutive negative growth months. That certainly wouldn’t be fun but it’s the reality of the market and something investors have to be aware of because the last few years have been a Goldilocks market and that won’t last forever. 

Last month, my portfolio ended at $552,488.41 so let’s see where it is now.

The Portfolio

My portfolio now sits at $540,010.44!

That’s a 2.26% reduction. It also marks the third month in a row of losses since my portfolio peaked at 558k in the September update. 

The decreases are smaller than the performance of the You Index due to additional contributions that keep flowing in every month. That’s the beauty of negative stock returns from a long term perspective. Any purchases I make today are at a better price than those I made in September. 

It’s important look at a falling market from that perspective as this is a long term game. It was nice to see the portfolio rise every month but in the long run, neither that nor the lower prices today matter that much. What’s important is where prices and my portfolio will be ten or more years from now when I need to rely on it for income generation or when I need to sell. That’s the long term game we’re playing and lower prices actually help that game as long as those lower prices don’t stick around for a decade plus!

Cash was unchanged this month and makes up 5.8% of the overall portfolio. That’s outside of my emergency fund and means I have some dry powder in case the market keeps falling and good values appear. 

Taxable accounts were down 2.7% this month. Tax-advantaged accounts were down 2.3% as they saw more contributions to offset the negative stock returns. 

Overall, it’s another negative month but what’s important is that share counts in my index funds keep increasing. My 401k and Roth IRA contributions keep flowing in and I’m excited about the reset into 2019 so I can bump up my 401k contributions to get a quick start on the year. 

Asset allocations are no doubt still an issue due to the big price movements so let’s see where those are this month.

Asset Allocation

 REITs and bonds remained solid this month but everything else lagged. 

Recent contributions went into U.S. small caps but that  is still lagging due to poor performance. Below is the comparison of how far my assets are from target versus last month. 

It’s clear that domestic performed poorly based on the comparison to last month. U.S. small cap is lower than last month despite money flowing into it due to poor domestic returns. 

Both bonds and REITs are above target and large cap continues to be above as well due to strong returns from UNH. However, the large cap deviation is much lower than it was last month due to poor S&P 500 performance this month. 

That means the plan for next month isn’t too different than last month. 

• 401k contributions into small caps, international developed and mid caps
• Cash is at 5.8%. Utilize cash to look for values in the mid cap, small cap and international space

Overall, the asset allocation isn’t too far from target. Market volatility will always start to skew asset allocations and makes for some good purchasing opportunities. Most recently, I was buying international stocks but now I’m adding domestic mid caps and small caps to the fold. 

My performance these past few months has certainly stalled. However, this has led to some more interesting purchasing opportunities. We’re also right on the cusp of the December dividend and long term gain payouts which will further increase my share counts. I don’t mind doing those at lower prices since it means more shares.

It’s hard to tell where the market goes from here. There’s a lot of uncertainty around rates, tariffs and growth but that always seems to be the case. Whether we go up or down, I know I’ll just keep buying as long as I am able to do that.

It’s important to be realistic when it comes to your portfolio. We’ve been due for a recession for quite some time now and the stock market is often a leading indicator. It’s easy to say I’ll keep buying but harder to do that if something happens and I lose my job. That’s why it’s important to be realistic about your savings and keep an emergency fund on hand so you don’t have to sell during an inopportune time. I’m not saying a recession is around the corner but it’s important to keep everything in mind.

It’s been easy to be an investor this past decade. It’ll eventually get harder and these negative months are a good reminder of that. 

Thanks for reading and let me know your thoughts.