What investments fared best in 2022? A recap
Where should I invest in 2023? To answer that question, we first need to explore the previous year, 2022. The year which was 2022 was another year of pain for investors overall. With inflation and rising interest rates contributing to significant drops in the stock market. Both the S&P 500 and the Nasdaq have fallen into bear markets, with the S&P 500 down almost 20% and the Nasdaq down 33%. Many well-known companies, including Apple and Amazon, have seen significant declines in their stock prices, with Apple reaching a 52-week low and Amazon down 50% year-to-date. The situation has been particularly dire for Meta, which has seen a 64% drop in its stock price. The Tesla stock price has been smashed, falling almost 70% for the year.
If we look at the S&P 500 index (described by Investopedia as a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S) return for the 12 month period over 2022 we see it has fallen about 19.95%. Compare that to 2021, where the return was an amazing 26.9%.
Some of the significant reasons for the poor performance of the market can be related back to:
- High inflation which has been soaring across most of the world’s economies as most Central Banks have been following a course of Quantitative Tightening (QT);
- The war between Russia/Ukraine which has impacted world food and fuel prices; and
- The chance of a recession in 2023 which the markets have most likely begun to factor in.
Following, I will present a couple of tables which outline some of the best and worst performing assets overall for the 2022 period.
Overall Assets Performance in 2022
The next table presents an alternative view on the 2022 performance. This table show the top performing Exchange Traded Funds (ETF’s). In simple terms, an ETF is a basket of securities that trade on an exchange just like a stock does. This summary is up to 23 November 2022.
Best Performing ETF’s in 2022
For those investors who were open to invest in more risky assets such as cryptocurrencies (a cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend) it was a disastrous year overall. The failure of stable coin terraUSD, liquidity issues across the crypto industry and the dramatic collapse of the FTX exchange, shocked investors and sent waves of fear through the entire market. The Bitcoin price dropped about 63% for the year. However, as of 17 January 2023, it has come back to life and it currently trades at $US21,156. This is still a long way from its high of $68,990.
Now that 2023 is upon us and February has arrived already, what are the risks that we need to consider as we prepare to invest our hard-earned funds?
What are the main risks faced by investors in 2023?
The headwinds facing investors in 2023 has certainly not diminished. If anything, they have increased and do not look to be leaving us anytime soon. The COVID 19 virus continues to antagonize populations and is particularly bad in China at the current time. Inflation remains sticky around the world and reserve banks are likely to continue to raise interest rates in the short term until it is obvious that inflation is coming down.
A recession, however, is another real risk to many of the world’s economies. A recession is typically characterized by a fall in a country’s Gross Domestic Product (GDP) for two consecutive quarters. This can be caused by various factors, such as a financial crisis, a decline in consumer spending, or an increase in interest rates. During a recession, businesses may struggle, and unemployment can rise. This can lead to financial hardship for individuals and families, as well as having negative impacts on the overall economy.
In addition to the above, we have geo-political tensions remaining high. The Russia/Ukraine war continues and at this stage, there is no immediate end in sight.
All the above will make markets nervous, and it is very likely that high volatility in share markets across the world will continue. If a recession does hit, then we are likely to see earnings pressure as companies report on Quarter 1, 2023.
When markets are booming, we are often hear the phrase, that ‘cash is trash’ and it is best to stay invested, otherwise, inflation is just melting away at the purchasing value over time. However, in high-risk times, when volatility is extreme, sometimes it is more prudent to sell out of risky assets and have cash available to make great buys when assets sell off and are at an excellent valuation.
It remains to be seen if the markets will encounter a significant correction in the near term. Investors need to remain cautious and vigilant. If there is a significant sell-off however, wonderful opportunities might present themselves. As the great investor Warren Buffett would say, “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.
Where should I invest in 2023?
As I am not a licensed financial planner/adviser, I cannot offer any financial advice. However, my own investing experience and learnings along the way (some of these have been painful) have tended to guide me well over the course of time. These learnings and suggestions include the following:
- Build up a cash saving equivalent to at least four of months’ salary to ride out any difficult times and or be ready to buy great assets at good valuations should we have a sizeable stock market fall
- Diversify your investments across asset classes including property, stocks, crypto. A goal of owning your own home/unit is very important so that you can come off the continuous ‘renting’ cycle
- Invest a higher percentage of your savings into superior assets within each asset class. An example approach would be as follows:
- Property – purchase your own home/unit that you can afford – do not overextend on a mortgage
- Stocks – purchase an equivalent dollar proportion of Google, Amazon, Apple, Tesla, Microsoft, Meta, Visa, Disney Johnson and Johnson (dollar cost average over time). Only buy stocks that you want to hold for the long term
- ETF’s – invest in a couple of the better performing, low-cost index funds. Two examples are Vanguard S&P 500 ETF (VOO) and Vanguard High Dividend Yield ETF (VYM)
- Cryptocurrency – though still high risk, this space could be life changing over the next 10 years and it is only in its infancy – with this component, adopting a lower risk to higher risk approach, split down into Bitcoin 70%, Ethereum 20%, Solana 10%. I would suggest only using a max 10% of your portfolio to this asset class
- If you are able to and have a regular salary, try to dollar-cost-average (dca) into these investments on an ongoing basis, eg this might be once a month and you might alternate across the various asset types
- For the investor, time is on your side. Do not try to ‘time the market’ but rather what is more important, is ‘time in the market’. If you can invest for the longer term (five years or more), the power of compounding will be significant
- Review your investment portfolio ongoing. Either a 6 monthly or yearly review is appropriate. Remove poor performing assets and reallocate funds as required.
Your PROFITABLE ACTION STEPS this time around:
- Write down your investment goals for 2023. At year end, you can review your progress and set the following year’s goals
- Review your current portfolio carefully and see how it has performed over 2022. Decide on a plan of action for 2023 and stick with it. Remove dud performers which have no chance of turning around. Decide on what asset class needs some attention. Investing even a small amount, on a regular basis, will add up over the course of time.
- Keep reading and learning. Find great investment books and knowledgeable YouTube channels. This will help you decide on suitable investment objectives and strategies.
- Bitcoin or any other cryptocurrency should only comprise a small percentage of your portfolio. As crypto is highly volatile, don’t invest anything in this space that you cannot afford to lose. As always, do your research first and consult your own financial planner/adviser.
- If you haven’t read this article on the ‘ELEMENTS OF INVESTING’, you will find it an interesting and informative read.
Stay safe, healthy and wise and most importantly of all, take ACTION.