The main lesson that investors can take from 2018 is that volatility can strike markets from seemingly nowhere, investment commentators say, but other take-home messages include understanding that great funds will underperform and managers should always be humble. 
One year ago, many investors looking into 2018 were expecting a continuation of the bull run after a decade of rising markets following the global financial crisis. While 2017 was a year characterised by low volatility, things changed in 2018.
Concerns such as the Federal Reserve’s move towards quantitative tightening, Donald Trump’s trade tariff onslaught, Brexit and signs of slowing global economic growth contributed to two sell-offs and a weak year for mainstream assets.
Performance of indices in 2018
Source: FE Analytics
Adrian Lowcock, head of personal investing at Willis Owen, said: “I think the main lesson is that things don’t always turn out as you’d expect.
“The year started on the back of low volatility of 2017 but that didn’t last in 2018 and whilst the global economy for once wasn’t hanging over a precipice, concerns quickly rose over the continued strength of the global economy.”
Another important lesson should be avoiding getting caught up in the moment: investors need to recognise markets can be irrational in the short term and there is temptation to pay over the odds for an exciting.
A case in point in 2018 for Lowcock was the technology sector, where some companies became extremely expensive in the short term and, while growth may eventually arrive, were starting to look priced for perfection.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said the return of volatility should have reminded investors that it’s not always smooth sailing in markets – indeed, it is “part and parcel of investing”.
“This isn’t the first time markets have been bumpy though, so while there are no new lessons to learn, a rocky year can reinforce some old ones,” he added.
One of the most important lessons should be the importance of diversification. While large parts of the market have made a loss in 2018, there are pockets where positive returns have been made; as no-one knows what the future holds, investors should spread their bets so they are able to capture some of the market’s gains wherever they come.
A second lesson can be gleaned from the collapse of UK facilities management company Carillion, which went into liquidation at the start of the year after it virtually ran out of cash.
Carillion’s share price since Jul 2017
Source: BBC, Bloomberg
“Carillion should remind investors to stay wary of ‘value traps’ – just because a stock’s fallen a long way doesn’t mean there’s no further to go,” Khalaf said.
For Simon Evan-Cook, senior investment manager for multi asset funds at Premier, 2018 should serve as a reminder that not every fund can outperform all the time but this isn’t reason to instantly drop any that start to lag.
“My lesson from 2018 is that great funds will underperform from time to time: this is a feature, not a flaw. And if you’re right on it being a great fund, it will prove to be a good time to invest more, not sell out of it,” he said.
“We had a few excellent fund managers struggle in the first half, as the only things that were going up were tech stocks. Such stocks fall outside of the parameters many of our managers use to select good investments, particularly if they’re running an income fund.
“But as we rolled into autumn, and the markets sold off, many of the funds that had dragged their heels over the summer did a fantastic defensive job for us, having avoided many of the momentum-driven stocks that were hardest hit.”
Ben Conway, co-head of fund management at Hawksmoor Investment Management, believes the past year should have taught investors to “be humble, lower expectations and not get distracted by the noise”.
By the end of October, close to 90 per cent of the assets tracked by Deutsche Bank showed a negative total return for the year-to-date in dollar terms, which is the highest percentage on record going back to 1901. In contrast, just 1 per cent the same assets ended 2017 in negative territory – namely, the Philippine bond market.
“This has been a truly challenging year for a multi-asset, or any investment manager for that matter, to make positive returns,” Conway added.
“The whole point of our existence as custodians and managers of people’s savings is to generate a positive real return after charges as a minimum. If we can’t do that consistently, we do not deserve to have the jobs we do.”
Conway also said multi-managers such as himself have to recognise that their proposition is more expensive than other approaches, with the added hurdle of most of our clients having to pay for advice on top of fees.
“We justify our fees by constructing portfolios of the world’s best active managers and accessing assets beyond equities and bonds via investment trusts. To do this, we cannot run billions of pounds, or we’d run into liquidity issues with our investments,” he said.
“However, the world’s investable assets have become so expensive that even these weapons at our disposal are becoming blunted.
“It is our duty in such times to do our best to preserve our clients’ capital, while communicating to them the difficulty – if not impossibility – of producing the returns of the past 10 years over the next 10 years.”
James de Bunsen, portfolio manager on the Janus Henderson multi-asset team, said 2018 shows that “portfolio construction matters because correlations change”.
He described 2017 as “the most extraordinary year” where volatility remained low and pretty much everything went up.
“2018 has been almost the mirror image and complacent investors have had a rude awakening. Driving this turnaround has been the reversal of quantitative easing and rising interest rates in the US,” he said.
“Given this well signposted backdrop, it is not surprising that bonds didn’t do well when equities corrected. Investors came to believe that government bonds would always bail them out when equities sold off, even though yields were close to zero and the monetary policy cycle was changing course.”
Against this backdrop, the Janus Henderson multi-asset team has spent increasing allocations to strategies and assets that had the potential to preserve capital in a dual equity and bond sell-off, with the potential for some gains.
Allocations were made to contrarian hedge fund managers, short-term trading strategies, gold, market-neutral commodity strategies and infrastructure, which have generated positive returns at key points in 2018 while traditional equities and bonds have fallen.
Bestinvest managing director Jason Hollands points out that two key factors have been at play in 2018: political events, including Donald Trump’s trade tariffs, Brexit and the spat between the EU and the Italian government; and – in his view, more importantly – a shift in the supply of liquidity by central banks and the impact of currency movements on portfolios.
“In my view, key lessons to be learned are not to get overly distracted by the white noise of politics but to think about the impact of the flow of liquidity on different assets classes and sectors,” he continued.
“Secondly, investors should not forget that currency exposure matters and trends can reverse, so currency diversification matters. Anyone who has exited or heavily reduced their UK exposure over the last couple of years might want to think carefully about what could happen if sterling recovers again or the dollar weakens from its current elevated levels.”