2018 Investment Review: Top Three Surprises

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What will you remember about 2018? For many it will be the final 12 weeks of the year when the stock market dropped double digits! This wiped out the entire year’s gains and sent most stock categories into negative returns. But that’s not all investors should note about last year. Here’s our pick of the top three 2018 investment strategies that stood out, either for the good or the bad.

# 1: Cash Is No Longer Trash

After years of miniscule returns on cash, during which most financial institutions fought over how many zeros they could put between the decimal point and the ending number, cash yields rose significantly. Instead of 0.001 percent yields, we’re currently seeing yields north of 2 percent! Some institutions are offering 2.25 percent for holding your cash. Yields on cash, money markets and CDs are all looking better and may now find a spot in your investment portfolio for the first time in years.

# 2: Cryptocurrencies Got Hammered

Cryptocurrencies took the investment world by storm in 2017 when the price of Bitcoin, which began the year around $3,667, hit a high of more than $22,664 in October of that year. Since then the cryptocurrency universe has been under a lot of pressure. 2018 was a reminder that what goes up too fast also can crash just as fast. In 2018, Bitcoin dropped more than -72 percent. Investors who bought into the mania as Bitcoin raced past $20,000 in 2017 ended up seeing it trade at $3,757 by the end of 2018.

Most everyone agrees that the technology backing the cryptocurrency market is here to stay. But how do we value the currencies? That’s still up for much debate. Placing a value on something that pays no interest, no dividends and has no earnings is virtually impossible to do. This market may be better left to investors who expect and are comfortable with wild swings of volatility, both good and bad.

# 3: Target Date Funds Once Again Showed Their Weakness

Target date funds are designed to be a one-stop-shop for investors. You pick the fund with the date around which you plan to retire, say 2025. The fund then manages your investment so it holds the right mix of various investment strategies in accordance to your specified retirement date. This financial device has been a blessing for investors in the 401k space since it makes it incredibly easy for you to manage your 401k. All you have to do is pick a fund and you’re done. These funds have generally performed as expected for investments that use a combination of various strategies.

So, what’s their big weakness? You can’t pick and choose which investments are sold when you need the money. This isn’t a problem when everything is on the rise. However, as the market falls you may not want to sell stocks that are suddenly down -15 percent. Ideally you would prefer to sell bonds, cash or another investment that has retained its value. But, since the fund is only one investment, when you sell it you are selling a portion of everything in the fund, including stocks. According to Morningstar, Inc., the target date fund 2025 category ended 2018 down -5.4 percent and fell over -7.5 percent in the third quarter alone. So, while target date funds are great for building up your portfolio while you are working, they may not be the appropriate solution once you begin taking distributions from your investments.

Summary

2018 will be remembered for the lump of coal the market gave stock investors at the end of the year. However, if you can step back from the day-to-day noise of the market you can use 2018 as a learning opportunity by asking yourself these questions: Can you handle the extreme volatility of cryptocurrencies? Do you understand the pros and cons of target date funds? Should cash become a bigger part of your investment portfolio? And, while we don’t yet know the three big surprises 2019 will bring, we can use 2018’s offerings--both good and bad--to guide us as we move forward.

Ryan Collier is the Director of Investment Management for Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at or email Ryan.

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