Outlook for 2018

Happy New Year! 2017 is in the books and its been a great year for investors all over. The US equity markets are flying high as all major indices continue to ring in all-time highs month after month; the multi-decade bond peak seems to be in, as interest rates are now on the upswing — not just in US, but in other countries as well. The commodities markets are starting their bull run as inflation is starting to rear its head after years of potential deflation, disinflation, and stagflation. New tech like blockchains and the cryptocurrency mania is capturing the imagination of the masses and making plenty of investors obscenely rich in a short period of time. But at the same time, every single sector/market has some dark clouds on horizon too — as investors get carried away and assume that risk has been mitigated which may not necessarily be the case.

But before we dive into how I intend to approach 2018, here’s an overview of how markets performed in 2017, courtesy of Novel Investor.

Outlook for 2018

2017 has been a great year, and with S&P 500 returning ~19%, who can complain?! Will 2018 bring the same? Who knows. 2018 is shaping up to be an interesting year no doubt.

As I wrote in the Outlook for 2017 post a year ago, I had hinted that the US$ had probably peaked and looking at it now retroactively, we can say that it did peak in Dec 2016 with  the US Dollar Index (DXY) at a 14-year high at the time. The following chart suggests that DXY has begun weakening (down ~10% in 2017) which will impact various markets in different ways.

This explains the returns in almost every asset class in 2017. The following tweet from Josh Crumb of GoldMoney Inc summarizes this point well.

The big story in 2018 to watch, due to the falling US$ is the return of inflation. Its a curse citizens of the world have to live with, as the Fed, ECB, BOJ, PBOC central bankers do anything and everything in their power to stoke inflation. Inflation is regarded as a gift and cheered on by bankers and the media, but let’s not forget what it really is: erosion of wealth and loss of purchasing power. This is why I continue to focus on real/hard assets that can withstand the fiat currency manipulation. Since 2016, I have deployed a lot of my capital in the commodities & real estate market (via REITs). A run from fiat has also fueled a new asset class worldwide – the cryptoasset market, which is seeing a mania as investors flock to protect their assets. I have started deploying some capital into the cryptoasset market since mid-2017 and the results have been phenomenal.

My focus for 2018

From an overall portfolio diversification, this is how our investment portfolio is structured.

The game plan for 2018 will be re-balancing and diversification.

Here are few action items that I will try to achieve, focus & adapt my portfolio for coming years.

  1. Navigate more towards a passive investing model and reduce number of holdings – I have too many active picks in my portfolio and do not want to focus on them day-to-day. Passive investing allows me to focus on other important things in my life — work, family, hobbies, life etc. Besides, most research has proved that it is unlikely or impossible to consistently beat the index year after year. Part of our portfolio is already using the passive investing model and I am considering moving more of my funds into ETFs instead of individual securities, across various asset classes.
  2. Active investing will still play a part of my portfolio. There are some stock and sectors that are too volatile and ripe for profiting, so I intend to focus on these when I can. Commodities, marijuana, cryptos are some sectors that are hot right now to invest and passive investing do not provide the returns that are possible by active picking. Of course, active investing comes with risk, but without risk there is no reward, and I need to look for the right opportunities and find those wealth multipliers.
  3. Continued focus on diversification — I want to reduce some of the high concentration in equities and intend to continue deploying more cash into other asset classes.
  4. Speaking of balancing acts, I have overexposed myself to the basic materials/commodities sector — more than I originally intended (thanks to some spectacular returns in 2017). Even though I am very bullish on the space, I am looking to trim some positions and bring that exposure down slightly.
  5. More on diversification — I intend to increase my exposure to international markets. Most of my equity exposure belongs to stocks in US and Canadian markets (although a lot of the companies have global revenue). I intend to target companies which have more increased revenue from international markets, where we can see more lucrative returns over the next few years/decades.

I will incorporate some of these points in my annual goals for the year 2018. In summary, the name of the game is to stay vigilant & diversified, take calculated risks and grow my portfolio as I work towards achieving financial independence.

Looking for investment ideas? Check out this Top Investment Picks for 2018, where 35+ bloggers present their top pick and a reason to invest in those securities.

What are your thoughts on the points mentioned above? Do you have any specific thoughts on the markets for the year 2018? Share with a comment below.

Full Disclosure: Our full list of holdings is available here.

8 thoughts on “Outlook for 2018

  1. R2R, I think the equity markets will be much more volatile in 2018. At some point we will get a 5%-10% pullback that will represent a buying opportunity before another leg up heading into the end of the year. These are just guesses on my part. I will just collect my dividends and reinvest them on a periodic basis trying to ignore the volatility and media noise that comes with it. Tom

    • Hi Tom,
      We could see the market melt up more before it starts crashing…most folks seem to have 2019 as their next recession target date and the Fed’s moves sure seem to suggest something along the same line. My opinion is that its not good to wait until that happens. The first 5% move down might start the dominos from falling and bring on the market reflexivity (a la Soros). Will be interesting to see how things play out.


  2. JC says:

    Who knows what will happen because just about every mainstream forecast for 2017 was wrong. I think volatility has to return as some point because I can’t imagine 2018 being a repeat of 2017 with nearly every single day being a move higher. I’ve thrown a little bit of money into the crypto space as well as a potential hedge and a just in case kind of thing and have been playing GDX/GDXJ/GLD via options. I think it’s just a matter of time before gold products start to move and my guess is that move is higher. So I want to be positioned to take advantage of that. I don’t know how much rebalancing we’ll do this year with existing funds; however, in my 401k I’m putting in a good amount to the non-US fund because I think that’s likely a good place to be. Although thinking about it now I need to see what the breakdown of that fund is because it might just be like Canada, Europe and Japan. All the best in 2018.

    • I hear you, JC. The vol trade is a pretty one-sided trade right now and the potential for profiting when it returns is huge…just figuring out the timing is the tricky part. Good to hear that you are hedging via gold and crypto…I am doing the same here. If crypto crashes, we might see inflows into the traditional safe investments like gold. However, with the total crypto market at a mere, $750B — its tiny and needs to grow leaps and bounds before it can be considered a systemic risk. I think I read somewhere that only 0.5-1% of world population owns some crypto…which goes to show that the penetration is still very low.

      All the best in 2018.

  3. It’s been an unblievable ride for the equity market in the past four years or so. The first four days of the year showed strength and was something that I was not expecting. Businesses are continually growing bigger. People all over the world are spending money more than ever.

    I’m skeptical but overall still positive for 2018. FAANG stocks will continue to rise.

    My 2 cents.

    • Thanks for sharing your thoughts, Bernz. I find it hard to believe how FAANGs will continue to keep delivering the same kind of results,…but then again I said the same at the beginning of 2017. Will be interesting to see how the markets develop. My game plan is to be a bit more defensive.

      Best wishes for 2018

    • Hi BHL,
      I think if there is a blowup either in US or elsewhere, things will effect others too — esp in this interconnected world. But once we are past the next recession and into the next cycle, Australia should do very well — its a miracle how you guys have not had a recession in so long (what is it, couple of decades?). Being geographically close to China and the being a trading partner with them should be very good for Australia over the long term. I will be looking to increasing my exposure to your part of the world if I can.


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