2022 was one of the worst years for financial markets in history. Stocks, bonds, and real estate, all provided negative double-digit returns leaving no place to hide. The intelligent and rational investor understands this is a normal, unpleasant, and necessary part of investing.
Ben Carlson recently discussed some of the lessons we can learn (and re-learned) from 2022.
I want to share with you my thoughts on four.
- Anything can happen in the short term.
Since 1928, stocks and bonds have been down in the same year on only three occasions before 2022.
2022 was the first year in history when both stocks and bonds dropped double digits, as the S&P 500 US index lost 18% while the aggregate US bond market lost 13%. Even 10-year US treasuries were down 15% during 2022(1).
The world is an incredibly complex system that evolves, and mutates far faster than ever. Anything can happen in the short term, even things that never happened before.
- Predicting the future is hard
Back in 2021, no one was predicting inflation would rise to 7%, mortgage rates would skyrocket almost overnight, or Russia would invade Ukraine, but all that happened. Virtually no one expected the 2008 financial crisis, the pandemic and nearly all other unexpected economic events throughout history.
My guess is that a year from now, we will have experienced several events that will have a significant impact [good and bad] on world economies, investment markets, interest rates etc. that none of us can even imagine today.
- Nothing works forever.
During most of the 2010s, technology companies like Apple, Microsoft, and Google dominated the market with oversized returns. An old saying is that “nothing fails quite like success on Wall Street because expectations are so high that it becomes nearly impossible to continue outperforming what investors think will happen in the future”.
During 2022, many would say that the inevitable happened in many of these high-flying tech stocks that were hit hard.
It’s quite common for the best performers during boom times to be amongst the worst performers during the lousy years. 2022 was no different.
Other trendy investment strategies can undoubtedly do well in the short run. Until they don’t. Whether it be commodities, gold, bitcoin, real estate, hedge funds or any strategy due jour. They often have their day in the sun with outsized short-term returns until they don’t.
- Market losses happen and will continue to happen.
2022 was a lousy year; however, it came after three solid years of positive market returns. The S&P 500 was up 31%, 18% and 28% in the three previous years. That’s pretty darn good.
2022 taught us again that while downturns are never fun if you focus on the big picture, market gains have historically far outweighed losses over the long term.
These are the annual returns (US) from 1928-2022.(1)
- Stocks: +9.6%
- Bonds: +4.6%
- Cash: +3.3%
The key to investing success is looking at things the same way one would look at investing in real estate or a business over the long term.
I always find it interesting when I hear the media talk about “today’s volatile markets”. Since stock markets are inherently volatile, I’m not sure what their point is. It’s akin to looking out at the ocean and saying, “it’s a wavey the ocean today”.
Inflation is Slowing Fast
Inflation is dropping quickly, which should allow for the stabilizing and eventually lowering interest rates. This is normally very good news for stock and bond markets.
Coming Soon: Great New Tax Strategy
First Home Savings Account (FHSA)
The FHSA allows certain first-time homebuyers or those who have not owned a home in 4 years to save up to $40,000 toward a home purchase, with a maximum annual contribution of $8,000 over five years. Contributions to the FHSA are tax-deductible and withdrawals to purchase a home are tax-free. You cannot get a better tax deal than this.
Contact myself or William, when available, so we can plan to take advantages of this highly beneficial plan for your children and grandchildren.
The views and opinions expressed in this article may not necessarily reflect those of IPC Securities Corporation.
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