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.

Investors face countless distractions every year. Whether it’s fear of missing out on this year’s top performing asset, or fear of your existing portfolio losing money, these distractions are designed to make you want to take action (and likely part you from your money).

Meanwhile, a successful investment plan is all about setting up a low cost, risk appropriate portfolio that you can stick to for the long term. That means not getting caught up chasing past performance, be it meme stocks or crypto or tech stocks for that matter. It also means not abandoning ship when global stocks and bonds tumble, as they did in 2022.

Finally, we should also recognize that we’re human and our plans can change. For instance, you might not have sold your equities in a panic this year, but it’s perfectly reasonable if you paused your regular contributions to focus on building up your emergency fund or paying down your mortgage. 

My Investing and Trading Activity 

Flexibility is the key to any good plan, and it was a theme for me when it came to my investing and trading activity this year. Long-time readers know that I invest my money in Vanguard’s All Equity ETF (VEQT) across all of my accounts except for my kids’ RESP (invested in TD e-Series funds).

But we decided to build a new house earlier this year and wanted to use our TFSA funds as part of the down payment. The decision to build a new home also influenced what we did with our corporate investing account, as we opted to pause these contributions to build up a larger cash cushion just in case.

Here’s what my investing and trading activity looked like in 2022:

RRSP

My wife and I pay ourselves dividends from our small business and so we don’t generate new RRSP contribution room. With both of our RRSPs fully maxed out, these accounts remained invested in Vanguard’s All Equity ETF (VEQT).

That said, I did place one trade in this account when VEQT’s annual distribution was paid in January.

My RRSP is down about 10.5% on the year.

LIRA

A similar story with my locked-in retirement account. This was set up in 2020 after my decision to leave my former employer’s pension plan and take the commuted value. I invested the funds in VEQT and plan to leave it there for the next 20+ years.

That said, I did place one trade in this account when VEQT’s annual distribution was paid in January.

My LIRA is down about 10.5% on the year.

TFSA

I contributed $6,000 to my TFSA in January and bought more units of VEQT in this account. But then we went house shopping and signed a purchase agreement to build a new house.

I sold all 3,300 units of VEQT at the end of January and transferred the proceeds over to an EQ Bank TFSA. I withdrew these funds this summer to make our first deposit on the new house.

VEQT was down about 4.5% on the year when I sold, and then I earned about $500 in interest while the funds were parked at EQ Bank.

Corporate Investment Account

My goal with our corporate investing account was to contribute $4,000 per month and invest in VEQT. The year started out that way, with contributions of $4,000 in January and February. I skipped March and April, and then contributed $16,000 in May, $8,000 in June, and $4,000 in July. 

I decided to pause contributions from there. We wanted to build up a bigger cash reserve just in case we had to draw from our company at some point to pay for overages on the new house (not yet!) or if we end up having to carry the mortgage on our existing house for longer than expected. It seems like a prudent move.

Total contributions of $36,000 this year. It’s down about 5% on the year – a better performance than my other accounts thanks to the timing of contributions in the first half of the year.

RESP

This is the account in which I stick to a robotic automated schedule every single year. I contribute $416.66 every month and immediately buy one of four TD e-Series funds (the one lagging its target allocation). 

Total contributions of $5,000 (plus $1,000 in government grants). It’s down about 8.75% on the year.

Final Thoughts

There you have it. I placed a total of nine ETF trades this year. One in my RRSP, one in my LIRA, two in my TFSA, and five in my corporate investing account. I placed 12 mutual fund trades in my kids’ RESP – buying more TD e-Series funds.

In a year of extreme market volatility I resisted the urge to deviate from my investment plan. I continue to hold VEQT across all of my account types, aside from my kids’ RESP.

But I did withdraw from my TFSA to make a deposit on our new house purchase. And I did pause regular contributions to my corporate investing account to build up more cash.

I feel like VEQT is still an excellent choice for someone like me who does not want to spend time managing and rebalancing a multi-ETF portfolio. Writing this post even reminded me that I can simplify my RRSP and LIRA even further by turning on automatic dividend reinvestment, saving me from placing one trade a year in those accounts.

And while the globally diversified VEQT will always underperform the top sector, country, or region every year, it will also outperform the worst sector, country, or region every year. It’s that tighter dispersion of returns that helps keep investors like me in their seat and able to stick to their long-term plans.

Welcome to another edition of Weekend Reading! I’m on holidays but I wanted to share a quick update and thank you to all of my readers and clients for your support this year.  

I started this blog back in 2010 during what I’d call the height of popularity for personal finance blogs. Today, the preferred mediums have shifted to podcasts, YouTube, TikTok, and Instagram. Blogs seem to be slowly fading away.

But I love writing and I plan to keep this blog going for as long as you’re interested in my takes on personal finance, investing, and retirement planning. I’ll continue sharing my successes and failures, answering reader questions in the ‘money bag‘, and rounding up the best personal finance articles from around the web.

I’m grateful for the 15 million page views in the 12 years since this blog launched – including 1.25M so far this year. What started as a way to share my experience with money turned into a freelance writing career and a financial planning business. Simply put, it has changed my life for the better.

I may never start a podcast or a YouTube channel or a TikTok account, but as long as you keep reading I promise to keep writing here.

I hope you all have a wonderful Christmas weekend. I might post something during the void between Christmas and New Year’s, but if not I’ll catch up with you in 2023!

Weekend Reading:

David Booth, founder of Dimensional Funds, says this past year has been a test on developing a financial plan you can stick with. I agree 100%.

A Wealth of Common Sense blogger Ben Carlson answers the impossible question of what’s going to happen in the stock market next year?

Mr. Carlson then looks at how often the market is down in consecutive years.

This terrific episode of the Rational Reminder podcast covers investing basics and answers common questions like should you own your employer’s stock, should you pick stocks in your TFSA, and how to prepare your portfolio for a recession.

On the topic of owning your employer’s stock I recall someone being upset that I suggested he unload a large amount of employer stock to diversify and accelerate some other financial goals. The stock went on to surge another 50% over the next six months. But today the stock is down 67% from the time he sold.

What is a good retirement income target? Fred Vettese argues that it’s not the often cited 70% of gross income (subs):

“If the mortgage is paid off and the children become self-supporting by retirement age, a good retirement income target is 50 per cent of gross income.”

Now to dash your hopes of safely spending up to 4% of your portfolio without fear of running out of money. New research suggests that number is closer to 2.7%:

Millionaire Teacher Andrew Hallam debunks the idea that after a stock market crash investors should move their money to ‘safe’ assets like gold.

Travel is a mess right now. Barry Choi shares a detailed guide to understand the ins and outs travel insurance. 

Patrick Sojka at Rewards Canada explains credit card spending caps in his latest loyalty lesson article.

Of Dollars and Data blogger Nick Maggiulli wonders if his parents could have avoided bankruptcy and divorce if they had a higher degree of financial literacy.

Mr. Maggiulli also rounded up his favourite investing writing of 2022.

Bank of Canada governor Tiff Macklem says the Bank missed the mark on rising inflation but a turnaround is near (subs).

Finally, why Canadian doctors trained at international medical schools increasingly give up on returning to their home country for work.

Happy holidays, everyone!