2022 Was a Test of Nerves; How Did You Fare?
If you aren’t willing to own a stock for 10 years, don’t even think about owning if for 10 minutes.
— Warren Buffett
Much like exams in school, 2022 (and the period from the COVID-19 pandemic in 2020) were a real test of nerves. Before the virus hit, the world economy was chugging along nicely, but everything has been a little topsy-turvy since then, and 2022 was just a continuation of this theme. The diagram below shows just how many events we have gone through last year. Anyone who claims to have been able to forecast these events, let alone the trajectory of markets in response to them, is likely lying. The constant uncertainty and the way events have shown to suddenly pop up shows just how futile it is to try to predict what could happen in the world, let alone in your investments.
A First in Almost Fifty Years
2022 was unique in that it was the first time in nearly 50 years that both stocks and bonds were down by double digits. So even if you were a conservative investor, holding bonds would not have buffered the volatility and losses experienced in your investment portfolio.
Over the past few years, we have really experienced many “Firsts”.
We have gone from lockdowns to re-openings, and had to adapt to drastic changes in our lifestyles and behaviour. However, the fact that we are still standing strong today is a testament to the power of the human spirit and the ingenuity of mankind, constantly innovating to overcome these challenges.
One thing you can count on is for markets to keep doing what they are supposed to do:
Pricing risk and uncertainty.
Providing a return to investors for assuming that risk.
Function as a conduit of capital from investors to companies to constantly innovate.
Another thing you can count on, is for markets to bounce back (and by the time that happens, hopefully you have had already allocated more capital, stayed invested and not sold off). The chart below from KKR shows how markets recover after experiencing a -25% sell off. 2022 is shown by the yellow arrow, and the green highlighted cells show the cumulative returns from 1 to 5 years after the sell-off. As long as you are an investor (considers a long timeframe) and not a trader (only looks at a very short timeframe), then you will be rewarded when investing during market turmoil.
So, How’d You Do?
How you fared during a year such as 2022 would also depend on whether you had a sound investment plan. What exactly is an investment plan? It is a comprehensive document which lists all the financial goals that you want to achieve — along with the details, solutions, and investment strategies needed to achieve those goals.
As long as your investment plan was sensible,
(what do we mean by sensible?),
Reasonable timeframe of 10 years or more, at least.
Market-like expected returns such as the long-term average around 8% for stocks, 4% for bonds. (not far-out figures like 15%, 20% or 30%)
Structured along evidence-based investing principles such as diversification, asset allocation and tilts to drivers of return.
Realistic and built for your own individual and unique needs, and not someone else’s.
then you need not worry about a blip like last year.
So how would 2023 look like? We really can’t tell you in advance, because predicting what would happen is hard. However, the data, probability and statistics are all on your side as the chart above suggests. In addition, during testing times like these, it does help to have a trusted, independent and fiduciary advisor guiding you through the uncertainty. And as long as you have a robust plan that can withstand the short-term ups and downs, and captures the long-term essence of what you want to do, then 2022 and other years like it would merely be a blip in your overall investing journey.
