By the close of 2018, the investment climate had changed significantly from just a year earlier.

In our final quarterly letter of 2017, we noted, “The S&P 500 Index was up 19% in 2017, and the MSCI EAFE Index, which measures the major international equity markets, was up 25% (as of 12/31/2017).” Roll forward 12 short months and the story was much different, with the S&P 500 Index down 4.4% in 2018, declining 9.0% in December alone. U.S. markets experienced one of the worst Decembers since the Great Depression. International markets did not fare any better in 2018, with the MSCI EAFE Index off 13.8% and the MSCI Emerging Markets Index down 14.6%.

While none of this may be news to you, we reference it to reiterate the points we made a year ago and have been making for the past several years. The current market volatility, and resulting declines, are no surprise to us considering how extended valuations have been—especially in the U.S. market.

For the past number of years, we have written about high valuations, the impact of central bank manipulation of interest rates, and the general investor complacency that tends to occur when there is little volatility and markets appear to only go up. We continue to believe that valuations always matter and that the price you pay for an investment has a significant bearing on long-term returns. These are key principles of our fundamental, bottom-up value investment approach.

How should investors navigate the current volatility and market uncertainty? Our answer is the same today as it was a year ago—and essentially the same as it has been for more than 40 years: Try to look beyond current market conditions and take a long-term view—of at least five years. A long-term mindset also means considering valuations and rebalancing to a normal asset-allocation model. At the end of 2017, many investors may have allowed their asset allocations to get out of balance and may have, among other things, been over-allocated to the U.S. market, especially to technology companies, and under-allocated to non-U.S. markets.