2016 will be remembered as a year that many people would like to forget. Horrifying terrorist attacks, a highly contentious U.S. election, and the death of many icons left many eager to put 2016 behind them. Through it all, investment markets generally held up well. However, 2016 also presented investors with some major pitfalls to navigate. Investors without disciplined investment strategies were at particular risk of making changes to their portfolios that could have harmed their returns.
The first pitfall investors encountered occurred at the beginning of the year. In the first six weeks of 2016, the S&P 500 Index fell approximately 11%. The Fed rate rise in late December, soft economic data in the U.S., and concerns of a hard landing in China all contributed to the decline. At the time, many were sure that the seven-year bull market had run its course. Any investor who acted on that hunch by reducing U.S. equity exposure missed out on the significant rally that followed. By mid-March, the S&P 500 Index had regained all its losses. Just a month later, the index was up another 4%.
The next potential trouble spot for investors occurred after the Brexit vote in late June. Pundits and odds makers had expected Brexit would fail and that the United Kingdom would remain in the European Union. As polls began to close, it became obvious that these predictions were wrong and markets in Europe responded with sharp declines. Over the next two days, the S&P 500 Index fell approximately 6% as concerns grew that the Euro may be falling apart. Investors who sold their stocks during this decline missed the gains when the market recovered and reached new all-time highs just two weeks later.
And finally, the last potential trap of the year was the U.S. election. Shortly before Election Day, the market began to sell off as the polls tightened. Some investors believed the market would sell off sharply if Donald Trump won the election and were not willing to take that risk. As the results began to come in, and as it became more evident that Trump would win, the futures on the S&P 500 Index began to sell off. At one point they were down as much as 5%, which probably made those who sold feel very smart. However, stock prices reversed later that night as investors began focusing on the pro-growth and pro-business aspects of Trump’s agenda. The S&P 500 Index not only recouped the 5% loss on the futures the next day, but also gained another 5% by year end.
If you were an investor who stuck to your strategy in 2016 and did not fall into any of the traps above, you would likely have earned solid portfolio returns. On the other hand, if you had significantly reduced your stock allocation in response to any of the events above, your returns would likely have been lower.
Following a long-term strategy can be difficult and 2016 offered many scary situations when reducing investments in stocks might have felt like the right thing to do. Success in meeting your long-term goals is highly dependent on your ability to follow your strategy, even when it is uncomfortable to do so.
2017 is sure to have its challenging moments in the world and in the markets. By responding to these challenges with discipline, investors can increase the likelihood that 2017 will be a year worth remembering.