CC0 Public Domain
I sometimes wonder whether people living through the great moments of history had any inkling what was going on.
Did a Roman legionnaire crossing the Rubicon in 49 BC, a religious exile on the Mayflower in 1620, or a peasant on the outskirts of Paris in 1789 feel historians, novelists and filmmakers looking over their shoulders?
Or were they just hungry and ready to go to bed?
Of course, for most of our long history, nothing much changed for most people.
Even in the past few hundred relatively revolutionary years, outside of the aristocracy, the church and the wealthiest families, most of humanity was powerless, uneducated, unable to read and too busy making sure they and their families had enough to eat.
Today things are different. Two billion people are on Facebook, and they all have an opinion. Few will have missed stories about the war in Syria, the migrant crisis in Europe, the election of Donald Trump, and the innumerable local furores across the globe.
In 2016 it not only felt like history was happening, but also that everyone had a ringside seat and a dog in the race.
And while I’d hazard our own political earthquake – Brexit – would be parochial to most of the world, the EU debate and its divisive aftermath seems to me emblematic of what everyone I know found a difficult year.
That’s before we even get into the weirdly comprehensive roll call of departed luminaries, which began with David Bowie in January and continued as if Death was running his bony finger down the phone book (or a social media friends list…)
I suspect historians will talk about 2016 for a long time to come.
Extraordinarily ordinary
Investors, though, will forget this year.
Not because nothing happened – it was tumultuous – but because barring an overnight crash, the final score looks pretty ho hum.
The US indices posted all-time highs in 2016, but that’s not as sensational as it sounds.
The S&P 500 is only up 10% or so for the year, for example. Nice, but modest when set against the talk of a new stock market bubble.
As for the UK, our All-Share index has posted 10% year-to-date.
Again, strong to be sure – especially compared to cash yielding near nothing – but only slightly ahead of the long-term average, with dividends.
Certainly not the sort of gangbuster returns that will jump off the screen in 50 years’ time to anyone who is perusing a graph of historical returns.
Brexit bounced, Trump dump trounced
Thing is, if you were paying attention as an investor this year then it often felt just as confounding watching the financial news on CNBC or Bloomberg as it did those political developments.
And often the two were entwined.
For example, I was watching the currency markets on 23rd June when it became clear that we’d voted to leave the EU, and I saw the pound plummet as never before.
Then the London Stock Exchange opened the next morning to chaos we’ve not seen since the financial crisis.
Huge FTSE 100 companies like Lloyds Banking Group were down 20% or more. It was difficult to get bids on many shares. For a moment it seemed the bottom had fallen out of the market.
Yet within just a few days this was all an anecdote – and a forgotten one within a few weeks. Now we talk about the “Brexit bounce”, as the UK’s big firms have rallied on the uplift from the weaker pound.
As for the US, its post-election sell-off was even shorter-lived, mainly confined to the overnight futures market.
Despite near-universal predictions that the election of Donald Trump would be catastrophic for US shares, they’ve rallied.
Even the President-Elect talks about a “Trump bounce”.
Easy… in retrospect
As you listen to market commentators trot out reasons why these gains all make perfect sense, it’s easy to feel this decent showing for investors was inevitable.
But I think that’s complacent, and tainted by what behavioural economists call ‘recency bias’.
Not to mention a feel good factor.
Most our portfolios will finish 2016 well up.
Not only has the FTSE All-Share advanced – the collapse in the pound has boosted the value of our overseas investments, too.
Any UK investor who was well diversified globally might feel like a genius, especially given all the tales of more lamentable returns from hedge funds.
Pfft! This investing lark is easy!
But do you remember how bleakly 2016 began? Oil crashing below $30 a barrel, China allegedly on the point of implosion, and the markets selling off hard… One big bank even made headlines around the world by advising its clients to “sell everything”!
Lately we’ve even seen bonds sell off and yields rise, which worrywarts have been dreading for years.
The eventual strength of equities in the midst of this veritable rock opera of doom was not inevitable.
The economists have another label – hindsight bias – for that.
The year we played whack-a-market
So can we draw any lessons from the challenges of 2016, and the way the news and the markets intersected to send shares bungee-jumping?
Perhaps.
You could argue it was a good year for passive investors who just top up their portfolios over the decades and ignore all the noise.
If you were an index fund investor who checked your portfolio on the last day of every year, then 2016 was just a puff of warm air blown into the billowing sails of your journey to retirement.
If you were a fully active investor like me, on the other hand, it was stormy sailing – but full of opportunity.
It is the sell-offs and the panics that give us stock pickers the chance to buy great companies at even better prices.
To mangle a Warren Buffett quote, you pay a high price as an investor when you buy shares on a breezeless sunny day.
As a citizen of the world, I don’t want 2017 to build upon the stormy and unpredictable template of 2016.
But as an investor, it could be a lot worse.
