Last year was brutal for both stocks and bonds. In the middle of the year, during what turned out to be the market bottom (and inflation peak) I suggested you stop checking your portfolio. This comes from the analogy that your portfolio is like a bar of soap; the more you touch it the smaller it gets.
The idea that stock and bond prices can fall in the short-term is precisely why investors are rewarded in the long-term. The problem is it’s hard to stick with even the most sensible investment plan because markets are extremely noisy and we almost always feel compelled to act.
I hear this from readers and clients all the time. In the 2010s it was all about the S&P 500. No reason to diversify beyond the top 500 U.S. companies when it’s the best performing index (completely ignoring the previous “lost decade”).
From 2020 to 2021 it was all about the NASDAQ. High-flying tech companies were changing the world and you were missing out if you didn’t add a technology “kicker” to your portfolio.
Investors who didn’t diversify beyond U.S. equities or large-cap technology stocks got a rude awakening last year. The NASDAQ was down 33%. The S&P 500 was down 18%. Meanwhile Canadians stocks were down 8.5% and a global portfolio of stocks was down about 11%.
Now what I’m hearing from readers and clients is that after a year of losses, investors are ready to capitulate and move to GICs. They’re forgetting:
“Investors who focus too much on short-term performance tend to react too negatively to recent losses, at the expense of long-term benefits.”
I don’t have a crystal ball to tell you how to position your portfolio in 2023. Last year I said to lower your expectations for future returns after years of outsized performance. Now the best I can offer is that we can increase our expectations for future returns after both stocks and bonds suffered double-digit losses.
So what should you do? Start by ignoring these three investing headlines this year.
1.) 2023 stock market predictions
Nobody else has a crystal ball either. So why do we eat up these market predictions every year? Besides being nothing more than useless guesses, most predictions invariably go with the current trend.
Last year’s predictions were for the stock market boom to continue (oops!). This year’s predictions are much more pessimistic.
This graphic from the Honest Math website has it right:
2.) Last year’s top performing stock(s) and ETF(s)
Back in the day (I’m talking in the original Wealthy Barber days), investors and their advisors picked investments after combing through performance reports to find last year’s top mutual fund managers and best performing stocks.
But decades of research and data now show this to be a laughably ineffective way to pick investments. Yes, there are a handful of active managers who outperform their benchmark index. The challenge is that it’s impossible to identify them in advance.
The same holds true for individual stocks and actively managed ETFs, or any asset class for that matter. What performed well in the past can quickly revert to the mean with a year of underperformance.
Look no further than the periodic table of investment returns – a brilliant visual on the power of diversification and why performance chasing leads to poor outcomes.
Last year’s winners become this year’s losers, and vice-versa. Making things worse, by the time regular investors shift their portfolios into these winning funds, sectors, or individual stocks, the money has likely already been made.
A better idea is to hold a diversified portfolio of assets so you never have to guess which one will outperform from year-to-year.
3.) What investors need to know today
The Globe and Mail has a long running column called, “what investors need to know today.” I hate it.
It’s great for news junkies who are interested in quarterly earnings reports, IPOs, mergers and acquisitions, inflation expectations, etc. But regular investors don’t *need* to know anything on a daily basis to maintain a sensible portfolio.
One of the main reasons I invest in Vanguard’s All Equity ETF is so that if I pulled a Rip Van Winkle and slept for two decades I could be reasonably confident that I’d end up with a good outcome from my investments.
What can a regular investor glean from a daily newspaper column that might give him an edge trading stocks with professional money managers and computer algorithms? Information is quickly baked into a company’s share price, so unless you have some type of insider knowledge you’re trading on the same information as everyone else. Not helpful.
What investors need to know today circles back to my original point at the top of this article. Stop checking your portfolio so often. Diversify broadly so you get a tighter dispersion of returns rather than the up-and-down roller coaster ride from year-to-year.
And stop chasing performance. Recognize that reversion to the mean will happen. Years of outperformance should lower your expectations for future returns. Similarly, a year of truly bad performance should increase your expectations for future returns.
Again, I don’t know what will happen in 2023, but I’m optimistic that stocks and bonds will have good future returns after a brutal year in 2022.