In 1816, Americans living on East Coast Europeans experienced a devastating environmental phenomenon. In what became known as the “Year Without a Summer,” chilly temperatures, torrential rains and thick fog across Europe and the East Coast during the summer months led to failed crops and near-famine conditions.
The cause of the anomaly was the biggest volcanic eruption in human history. On the other side of the world, Indonesia’s Mount Tambora in April 1815 spewed millions of tons of dust, ash and sulfur dioxide into the atmosphere, temporarily changing the world’s climate and dropping global temperatures by as much as 3 degrees Fahrenheit.
Unfortunately, investors in 2018 experienced their own version of the year without a summer, what I’ll call the “Year Without Gains.” It’s officially the worst year on record in terms of the percentage of asset classes that lost money on a dollar-adjusted basis. As the Table 1 from Charlie Bilello at Pension Partners shows, every asset class but cash lost money.
Granted, the losses weren’t of the magnitude that investors saw in the Great Depression or the more recent Great Recession, but the breadth of the losses was remarkable. There simply was no where to hide except cash.
For those hoping to avoid the carnage with hedge funds or alternative funds, you were out of luck as well. The Barclay Hedge Fund Index was down 5.10% for the year. The Credit Suisse Managed Futures index was down 6.94%. (Managed futures funds use trend following or momentum signals to bet on or against various assets.)
In 2018, it didn’t seem to matter what asset you invested in or what strategy your used. They all lost money except cash.
Interestingly, the historically bad year of 2018 came on the heels of the historically great year of 2017, where every asset class and most alternative strategies made money. Indeed, it was one of the calmest years in history, gently going up month after month no matter what your investments.
So, what are the lessons to be learned?
- Do not expect the markets to behave normally. Unusual events are, well, normal.
- Have a plan and stick to it because you cannot predict the future.
- Sometimes losing less makes you the winner. While Treasury bonds didn’t perform great, they also didn’t lose much money, allowing you to fight another day. (Diversification still works, even in a year like 2018.)