A new year’s resolution for investing in 2023
By Peter Dine – 10 February 2023
2022 was brutal for investing with many investment markets significantly lower at the end of the year than they were at the start. Take your pick. The New Zealand share market was down 12%. Globally, share markets were down by a similar 11.4%. Fixed interest investments didn’t fare any better. Our local fixed interest market was down 7.8% and the global equivalent was down 11.7%. Even worse, local and global listed property trust indices were down by more than 22%. New Zealand residential property, the “go to” investment for many Kiwis, wasn’t immune either. The REINZ house price index showed an annual decline of 13.7%. Of the few bright lights, global infrastructure was up 7.2%, and cash returned a modest 2.2%.
For a balanced portfolio of global equities and bonds, 2022 was the worst year in almost a century. With numbers like that, it would be easy for investors to become despondent, tear up their investment strategies and start over again.
This is based on the premise that things can only get worse. Sharply rising interest rates around the world have reset the dial for asset prices generally which represent much better value than they did 12 months ago. While no one can be sure what lies ahead near term, history tells as periods of negative markets are followed by extended periods of positive returns. And we have already experienced a strong start for markets in 2023 but 6 weeks does not mean a trend!
Since 1900, a portfolio invested equally in global equities and bonds has produced a positive calendar year return 77% of the time. During this 122-year period, there have only been 5 instances of consecutive negative years and 2 of these were during the great depression. Furthermore, the magnitude of positive returns has on average been significantly greater than the magnitude of negative returns.
So, if you are going to make a new year’s resolution for your investments after a painful 2022, start by avoiding some of the most common mistakes investors make. These include:
- Chasing performance: Trying to replicate the performance of others by buying the same stocks or funds that have performed well in the past. In a similar vein, selling stocks or funds after a bad year. This can lead to buying high and selling low, the very opposite of what investors should do.
- Timing the market: Attempting to time the market by buying and selling based on short-term market movements. It’s extraordinarily difficult to predict market movements with certainty and attempting to do so comes with the risk is missing out on potential gains or suffering losses. For 2023, there is a risk of sitting on the side lines trying to time the bottom of markets and missing the potential upside. As mentioned above, we’ve already witnessed a strong start to 2023. At the time of writing, the NZ share market is up 4.5% year to date, the US S&P 500 stock index is up 7.5% and the tech heavy Nasdaq index up nearly 14.5%.
- Lack of diversification: Investing in only a few stocks or funds can lead to significant losses if those investments perform poorly or collapse altogether. Diversifying investments across different asset classes and sectors reduces risk. While 2022 was particularly tough, even for well diversified strategies – because most asset classes performed poorly, that doesn’t mean investors should ditch a well-diversified strategy because of one challenging year. Diversification is still the closest thing to a ‘free lunch’ when it comes to investing.
- Not having a plan: Not having a clear investment plan or strategy can lead to impulsive investment decisions or investing in the wrong areas. Generally, long term investment strategies should have a higher allocation to growth assets whereas shorter term strategies should be weighted more to defensive assets.
- Emotional investing: Investors can be influenced by emotions such as fear, greed, and hope, leading to impulsive decisions that can negatively impact their investments. For example, fear is a very powerful emotion, and some investors feel the urge to bail out of their investment strategies to avoid short-term negative returns even if it costs them in the longer term.
- Not understanding investments: Some investors might invest in products or assets that they don’t understand, leading to poor investment decisions. Cryptocurrencies come to mind, but even mainstream investments aren’t always well understood. If a fixed interest investment is paying investors a return that is 3% pa higher than other fixed interest investments for a similar term, there will be a reason. Rather than just being a bargain, in all likelihood, the higher yielding investment will come with a greater risk of default.
- Value for money: Some investors might not consider the costs associated with investments such as management fees, transaction costs, and taxes, which can eat into returns. At the same time, costs need to be balanced with investment outcomes. Cheapest does not mean best. It is important for investors to understand what they are paying for.
- Not monitoring investments: Not regularly monitoring investments can lead to missed opportunities or potential problems. If investors are not monitoring how their investments are doing, how will they know if they are track with their investment strategy? While it is important not to make knee-jerk decisions, markets are dynamic, and peoples’ situations change. There may be legitimate reasons to amend an investment strategy or change some of the investments over time.
Investing can be a complex process and it’s important to have a clear investment plan and strategy, a well-diversified portfolio, and to avoid impulsive decisions. Additionally, investors should seek professional advice before making important investment decisions.
If you are contemplating a new year’s resolution for your investments, do yourself a favour and have a no obligation chat with one of our experienced Financial Advisers. It may be the best decision you make this year.
The 2022 calendar returns quoted in this article are from the following market indices. S&P/NZX 50, MSCI World NZD, S&P/NZX NZ Composite Bond A Grade, Bloomberg Global Aggregate Hdg NZD, S&P/NZX All Real Estate, FTSE EPRA Nareit Developed Hdg AUD, S&P Global Infrastructure AUD, S&P/NZX NZ 90D B-Bill NZD.
The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances.