December returns and 2018 reviewPosted: 2019-01-05
Well, what a month.
The October bloodbath resumed in December, and then some, after a brief November hiatus. US stock markets fell by over 9%, just in the single month. Even Donald Trump has subsequently conceded that stock markets “hit a glitch”.
Given the reality TV show that is the Trump presidency it is hard to say exactly which news story drove such a drop, but you can take your pick from:
- Trump attacking the Fed – which calls into question American economic governance.
- The ongoing ‘trade war’ between the USA and China.
- The government shutdown in the USA, due to the standoff between Trump and Congress over the $5bn border wall. This has resulted in hundreds of thousands of American workers not being paid/not working; I am never clear whether, if the shutdown stops, they then get backpay, so I’m not quite clear how severe this actually is but it clearly can’t be good.
On top of the Trump nonsense, I think that we saw the first rumours in December of a more significant slowdown in China. As 2019 started Apple shocked markets with (slightly Polyanna-ish) tales of Chinese woe.
While UK news was feverish about the inability of the Tory government to pass its EU Brexit deal through parliament, this had very little discernible impact on UK markets; I tend to agree with the commentators who say that this outcome was ‘priced in’ (i.e. expected) by the market already.
Bonds actually had quite a good month. I’m not particularly sure why though I think that the climate of rising rates and ‘flight to quality’ both probably helped.
For my portfolio, December was brutal. Stocks in my portfolio that dropped in price by 12% or more included: retailers Next, Inditex, SCS, and Tanger Factory Outlet; as well as manufacturers/engineers John D Wood, Alumasc, Babcock, and US bluechips WFC and XOM, I also took significant hits on EMR, AMZN, JPM, and a host of others.
Gainers were few and far between. The most notable for me is an illiquid Private Equity fund that my private bank has got me into, which allegedly went up 11%. Mining stocks rose too, and after the builders’ bloodbath last month Berkeley Group, in particular, rallied 8%. But these were crumbs of comfort.
Given that I remain somewhat leveraged, in theory I potentially get especially clobbered by market drops. In practice my portfolio almost exactly tracked the market in December, dropping by just over 6%. In the month. As my heatmap below shows, this was the worst month since I started tracking this stuff properly six years ago.
Last month, and moreover last quarter, have turned 2018 into the first clearly down year since my tracking began. It wasn’t looking too bad as late as September, and even now the fact that six months of 2018 saw falls isn’t that unusual (compared to five in 2015 and 2014 for instance). But a balanced portfolio dropping by over 5% twice in three months is pretty unusual, to put it mildly.
Looking into what rose/fell in 2018, the short answer that the best place to have been would have been in USD, in cash. And the UK, or UK equities in particular, was among the worst places to invest. With interest rates rising to around 3%, and the currency gaining 6% against the pound, your pounds could have had over 8% return by moving all your money into USD at the start of the year. Almost any other approach saw you lose money last year, especially if you were long in equities as I have been. But even as an equity investor, the USA was the place to be, Trump notwithstanding.
Taking a step back, my annualised returns since inception (1/1/2013) have dropped to slightly below 10%. Per year. This definitely isn’t the end of the investing world as we know it. We’re back where we were in around mid 2017, i.e. we’ve lost 18 months.
But beyond the investment returns per say, I had set myself three goals for 2018. How did I do?
1. Reduce taxes and expenses.
My 2018 objectives were to get my investment tax rate from 30% to below 29%, and reduce average expenses rate from 0.65% to 0.60%, a drop of 5bps.
What’s happened? Well, the big move here was redeploying the windfalls I received in Q2 into low-tax/low-fee places. Mainly as a consequence, my expense rate has dropped by 14bps; alas I think my measurement is not consistent with 12 months ago but I make the current blended (across both my and Mrs FvL’s accounts) expense rate 0.61% (0.18% excluding my private banking account). And my investment tax rate has dropped to 28.8% – this is a clear WIN.
2. Maintain my (slowly deleveraging) allocation.
I wanted to get my leverage down below a cash allocation of -20%, and I wanted to stick within my ‘tramlines’.
Thanks, again, to the windfalls, I sailed past my leverage objective in Q2. Since then I have been releveraging a little, and of course markets have fallen which increases my leverage. But I finish the year with my cash allocation at -19% of my invested portfolio (excluding Mrs FvL, which has no leverage). I’m ahead of target, by a bit. One additional factor, which is not tracked as part of my invested portfolio, is that I have been making some mortgage repayments (against interest-only mortgages); if I had instead used these funds to reduce my margin loan I would be at a cash allocation of -18%.
As to my tramlines, I finish the year with only one of my cells adrift by more than 1% of my portfolio value. I didn’t define exactly what success feels like here but I am OK with this performance; I have been trimming the sails regularly and reinvesting income almost exclusively towards the underweight exposures. I call this a WIN too. The only slightly amber cloud in this sky is that, after December’s dramatic drop in equity values, my *total* fixed income allocation is too high by 2.5% of the portfolio.
I grade this goal a clear WIN.
3. Learn something new.
This time last year, I deliberately avoided committing to a goal of reading more books, fearing the worst, and went for the more-achievable-sounding “learn something new, that I can put into practice with my investing”.
A year on, I cringe as I try to hold myself accountable to this goal. I think I have learnt quite a bit this year, but I struggle to summarise any of it here.
Yes, I’ve learnt about some new companies, I’ve seen the value in getting outside my usual media bubble, I’ve learnt stuff from my blog commenters like @zxspectrum48 and @grasmi, and I’ve built further evidence for my investing track record both on this blog and as an angel investor. All of which makes me wiser, more experienced, and probably more learned. But I am somewhat short of crisp lessons I can repeat here.
Sadly, the most pertinent lesson for me in 2018 was what I learnt from a close friend’s demise in his early 50s. His death, and the hopes/plans of mine that it has dashed, has made me reconsider my chances of not making it another 10 years. This, along with the complexity blog post I wrote and its comments, have had me start seriously appraising my ‘wind down mechanisms’. That rather morbid lesson is definitely not what I was expecting a year ago, and that is my main lesson from 2018.