I hope everyone had some money invested in the market last year… The economy is booming and I hope it continues this same trajectory for a LONG time! So, should you invest in the stock market in 2018?
Whether you support Trump, Obama or neither, you can’t deny that the market has been a tear since the crash in 2008. I’ve heard arguments that Obama should get the credit for the way the stock market has performed, while others argue Trump is the main reason the market has performed so well… I do not want to get political in this post.
One of my coworkers asked me to write a post about the effect the market growth had on a portfolio, so instead of getting political, I will tackle the following:
- The effect the market growth in 2017 had on a hypothetical portfolio
- How the U.S. market performed relative to the global market
- A historic breakdown for S&P 500 returns over different Presidential terms
- Wrap up
How much did your investments grow in 2017?
Let’s say you had a $100k in your 401(k) and invested in an S&P index fund, I’ll use the Vanguard S&P 500 index fund as an example. This fund performed very well in 2017…
Let’s say you maxed out your 401(k) by contributing $1,500 to it each month. Therefore, you invested an additional $18k throughout the year. The Vanguard S&P 500 returned 22% over the year. If I break that down by month, that is a 1.8% return each month.
Here are the numbers:
This table is showing a $1,500 contribution each month into your 401(k). The 1.83% is a monthly return. I derived this by taking the 22% annual return that the S&P returned in 2017 and divided it by 12.
At the beginning of 2017, you had $100k. You put in $18k. Therefore, you gained $26,290 because of the market upside in 2017… That is pretty incredible.
If you haven’t already looked at how your investment portfolio performed in 2017, I would highly encourage you to do so. Maybe you outperformed the calculation I displayed above? Perhaps you didn’t and it would be worth digging deeper into the reasons why.
Here are a few thoughts I have as to why you didn’t perform as well:
- You could have a significant portion of your portfolio invested in bonds. This is a personal choice, but if you are outside of 10 years from retirement, I would recommend less than 10% of your portfolio to be tied up in bond funds.
- Fees. Check on the fee’s you are charged. There are many sources of fees.
- Your 401(k) provided likely charges a management few – hopefully, these are small (< 0.75%).
- If you use an active investor, check how much they are charging you. Hopefully, it is no more than 1.0%.
- Check the cost of the funds you invest in. I am a huge fan of Vanguard because of their low-cost index funds.
How did the rest of the world perform compared to the U.S. in 2017?
What is interesting is the U.S. market performed exceptionally well… But how did we fare against the rest of the world?
Looking at my 401(k) got me thinking about this because I invest about 40% of my 401(k) in Vanguards Total International Stock market fund (VTIAX).
What I found interesting is that the VTIAX fund (international) had the best return for me in 2017… It came in with an annual return of 26.7%!!!
Here is a table displaying the returns for each fund I invest my 401(k) in:
These are amazingly great returns.
So why invest in funds or companies outside of the U.S.?
There is a strong argument that most of the companies in the VFIAX and VTSAX index funds are global companies. Therefore, by investing in these companies you gain exposure to the entire global market.
While I do not disagree with this argument, I still like to diversify my investments and I do so by holding a percentage of my portfolio in the VTIAX fund. For my 401(k), I hold about 40% in the VTIAX fund.
Diversification is important for any portfolio to be successful.
Breakdown of returns with different Presidents
This interactive chart shows the running percentage gain in the S&P 500 by Presidential term. Each series begins in the month of inauguration and runs to the end of the term. The y-axis shows the total percentage increase or decrease in the S&P 500 and the x-axis shows the term length in months. Click any president name in the legend to add or remove graph lines.
What is interesting about this chart is taking a look at which party, Democrat or Republican, has performed better. This data goes back about 100 years.
This chart displays S&P 500 performance after each president’s first term (4 years). The top three are President’s that were Democrats. The next three (Eisenhower, GHW Bush, and Reagan) were all Republicans. Johnson and Carter were Democrats, Nixon was a Republican, Truman was a Democrat and GW Bush and Hoover were both Republicans.
The Democrats, at least on paper, outperformed the Republicans that were in office.
Or did they?
Here is one more chart showing Presidents that lasted two terms.
You can see they all performed well except for GW Bush, who had a few tragic events occur during his Presidency (911 and the housing crash).
What about President Trump?
It is hard to tell. I’m not getting into a political discussion here because my point is to merely show data that exists and see what I can interpret from the data. We only have one year of data one how Trump has performed. So how does Trump’s first year compare to the other Presidents over the last century?
Trump is definitely up there… His performance really stands out when you consider he inherited a pretty good market/economy, to begin with.
How much does the President really impact the market?
This is a difficult question to answer. And I don’t have an answer to this question.
I look at the housing crash, which had a significant, negative impact on the market. Was this really President Bush’s fault?
I don’t believe so. Sure, the government should have known more about what the banks were doing – which was handing out loans, especially to folks that didn’t really qualify for the loans they were taking out.
By the time they did find out, it was too late. The damage was done and the housing crash ensued.
This is just one example.
Another piece of evidence that should be considered is the health of the economy/markets that a President inherited. For example, President Obama inherited a terrible market from the housing crash. He was not only able to get the economy out from the crash but he the economy/market continued to grow during 7 of his 8 years as President.
The market in 2017 performed very well. Will it continue into 2018? The signs are good so far, but at some point, the market will likely need to correct itself. Now, it could be years before a correction happens, or it could be months. No one really knows.
When looking at your investments, take a look at how well you are diversified. I’m glad I have international exposure in my 401(k) portfolio as well as a healthy dose of U.S. funds.
Finally, one role for the President in the U.S. is to stimulate the economy. The data from Macrotrends is interesting to look at, but I’m not sure it can really help us predict how a President will perform in regards to stimulating the economy.