2022 was a rocky year for markets. These 10 investment lessons show that sticking to a well-thought-out plan remains the best strategy.<\/p>\n\n\n\n
While each year features new twists on the age-old investment stories, smart investors know how to apply the same basic principles to every event. That\u2019s why one of my favorite sayings is that there\u2019s nothing new in investing, only investment history you don\u2019t know. Last year, however, investors did experience something that happened for the first time in history. In my top 10 lessons of 2022, I\u2019ll explain what we learned from the markets and why sticking to a well-thought-out financial plan remains the best strategy.<\/p>\n\n\n\n
Last year was particularly difficult for many investors because it was the first time that both the S&P 500 and 20-year Treasury bonds experienced double-digit declines. Although this was a first, investors should not be taken off guard. There are five other years in history \u2014 1931, 1969, 1973, 1977 and 2018 \u2014 when both produced negative returns. Despite the historical precedent, the losses were a big surprise for investors who, influenced by recency bias, came to believe that safe bonds were a sure hedge for risky stocks.<\/p>\n\n\n\n
In 2022, the finance craze was investing in disruptive, innovation companies with recent IPOs. By the end of the year, these investments had all repriced lower. Investing in young companies that are unprofitable but have high investment spending \u2014 making investors think they are poised for growth \u2014 has produced poor returns historically. And while exciting investment narratives that capture the public\u2019s attention may be different, the basic principles of investing are always the same.<\/p>\n\n\n\n
Last year we saw heightened volatility across markets, even those considered safer, including Treasury bonds and municipal bonds. Investors should be prepared for greater volatility because, for many reasons, markets have become less liquid. When there is low liquidity, big market swings are much more likely because it\u2019s harder to buy and sell a security without affecting its price. Accepting that market swings are becoming more frequent should help investors stay the course.<\/p>\n\n\n\n
Although gold had performed extremely well in the past few years, in 2022 it disappointed investors, just when an inflation hedge was needed most. Last year proved that buying this shiny security won\u2019t save your portfolio from inflation in the short run \u2014 though it might if your investment horizon is at least 100 years. The same goes for bitcoin, which cryptocurrency investors and advocates have also promoted as a hedge against inflation.<\/p>\n\n\n\n
Value investing is a time-tested strategy in which investors buy securities that appear cheap relative to some fundamental anchor. Although decades of evidence have demonstrated the benefits of value investing, many investors fled value stocks after they underperformed for a relatively short four-year period starting in November 2016. But those that stayed the course were rewarded: between November 2020 and December 2022, value stocks once again outperformed growth stocks around the globe.<\/p>\n\n\n\n
Historically, investors tend to buy yesterday\u2019s winners (after the great performance) and sell yesterday\u2019s losers (after the loss has already been incurred). Unfortunately, a return in a past year doesn\u2019t necessarily predict the same return the next year. For example, in 2021, the Dow Jones Select REIT index outperformed the S&P 500, with a 45.9% return compared with 28.7%. In 2022, however, it underperformed, with a -26% return compared with -18.1% for the S&P 500.<\/p>\n\n\n\n
After the Great Recession, many argued that diversification no longer works because risky assets have become too correlated. However, diversification benefits also come from the dispersion of returns, or the range of returns in a group of stocks. Last year we saw a wide dispersion of returns once again, consistent with the last 20 years, showing that diversification still has strong benefits, particularly international diversification. For example, U.S. small-value stocks outperformed the S&P 500, and international and emerging markets stocks did as well.<\/p>\n\n\n\n
Last year was another in which the majority of active funds underperformed even though proponents claim active managers outperform in bear markets. And even when active management does lead to an investor\u2019s portfolio outperforming benchmarks, it\u2019s typically short lived.<\/p>\n\n\n\n
Illiquid assets are those that cannot easily be converted into cash, such as private equity, venture capital, reinsurance risk and private credit. Because of this risk, investors require some additional compensation when investing in them. That\u2019s known as a liquidity premium. The risk becomes greater during difficult economic times when investors may be desiring liquidity. Last year reinforced that investors should only allocate what they can afford to illiquid holdings.<\/p>\n\n\n\n
Market movements are often dominated by surprises, which, of course, can\u2019t be predicted. For the Federal Reserve, the big surprise in 2022 was that inflation turned out to be higher than expected. In fact, inflation as measured by the Fed\u2019s preferred price index ended up being more than double its forecast for the year. As economic forecasts are often wrong, it\u2019s unlikely that market strategists will be able to forecast future performance. The lesson for investors is to tune out predictions. Instead, stick to your investment plan, focus on diversification, and rebalance your portfolio when needed.<\/p>\n\n\n\n
Every investor makes mistakes. However, smart investors don\u2019t repeat the same mistakes and expect different outcomes. By utilizing the 10 lessons 2022 taught us, you can avoid making common investment errors. It\u2019s also important to know your financial history and have an investment strategy backed by evidence. If you don\u2019t have a strategy, let us know if we can help.<\/p>\n\n\n\n
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