Last year was brutal for both equities and bonds. Midway through the year, when it turned out to be a market bottom (and inflation peak), I suggested stopping portfolio checks. This comes from the analogy that portfolios are like soap. It gets smaller the more you touch it.
The idea that stock and bond prices can fall in the short term is why investors get rewarded in the long run. The problem is that the market is so tumultuous that most of the time you feel compelled to act, making it hard to stick to the smartest investment plans.
We hear this all the time from our readers and clients. The 2010s were all about the S&P 500. There’s no reason to diversify over the top 500 US companies (ignoring the past “lost decade” entirely) if that’s the best performing index.
In 2020-2021, it was all about NASDAQ. High-handed tech companies are changing the world, and unless you add a tech “kicker” to your portfolio, you’re missing out on an opportunity.
Investors who haven’t diversified beyond U.S. stocks and big tech stocks have had a disrespectful awakening last year. The NASDAQ has fallen 33% of his. The S&P 500 is down 18% for him. Meanwhile, Canadian stocks fell his 8.5%, while his global stock portfolio fell about 11%.
What we are hearing from our readers and clients now is that after a year of losses, investors are ready to surrender and move to GIC. they forget:
“Investors who focus too much on short-term performance tend to react too negatively to recent losses at the expense of long-term gains.”
There is no crystal ball to explain how we will position our portfolio in 2023. Last year, after years of extraordinary performance, I told them to lower their expectations of future returns. The best I can offer right now is that expectations for future returns can be raised after both stocks and bonds have suffered double-digit losses.
So what should you do? This year, he begins by ignoring these three investment headlines.
1.) Stock market predictions for 2023
No one else has a crystal ball. So why gobble up these market forecasts year after year? Besides being nothing more than unhelpful speculation, most forecasts always follow current trends.
Last year’s prediction was that the stock market boom would continue (oops!). This year’s forecast is much more pessimistic.
This diagram from the Honest Math website does it right.
2.) Last Year’s Top Performing Stocks and ETFs
Back in the days of Wealthy Barber, investors and their advisors combed through performance reports to find last year’s top mutual fund managers and best-performing stocks before picking their investments.
But decades of research and data show that this is a ridiculously ineffective way to pick investments. The problem is that it is impossible to identify them in advance.
The same is true for individual stocks, actively managed ETFs, or any asset class. Those who have performed well in the past can quickly return to average after a year of poor performance.
See the periodic table of return on investment. It beautifully visualizes the power of decentralization and why the pursuit of performance can lead to poor results.
Last year’s winners will be this year’s losers, and vice versa. Worse, by the time regular investors shift their portfolios into these successful funds, sectors or individual stocks, the money may already have been made.
A better idea is to keep a diversified portfolio of assets. That way you don’t have to guess which assets will outperform each year.
3.) What investors need to know today
The Globe and Mail says:What today’s investors need to know” i hate it.
Great for news junkies interested in quarterly earnings reports, IPOs, mergers and acquisitions, inflation expectations, etc., but not for regular investors*necessary*Know something on a daily basis to maintain a sensible portfolio.
One of the main reasons I invest in Vanguard’s All Equity ETF is because I can be reasonably confident that even if I slept for 20 years pulling Rip Van Winkle, I would still get good results from my investment.
What can a regular investor learn from a daily newspaper column that might give them an advantage when trading stocks with professional money managers and computer algorithms? It’s embedded in the company’s stock price, so unless you have some insider knowledge, you’re trading on the same information as everyone else. It doesn’t help.
What investors need to know today goes back to the first point of this article. Stop checking your portfolio too often. Instead of riding a rollercoaster of ups and downs from year to year, spread it out widely to reduce the variability of your returns.
And stop chasing performance. Recognize that regression to the mean will occur. Years of outperformance should lower expectations of future returns. Similarly, a really bad year should raise expectations for future returns.
Again, we don’t know what will happen in 2023, but we are optimistic about future returns in equities and bonds after a tough year in 2022.
