For anyone poring over their December 31 annual investment statements—a common activity at this time of year—this review often comes with questions. This is no doubt what happened to my client who, following the confirmation of his annual follow-up appointment, asked me to take advantage of our meeting to “talk about [ses] returns”.
If, like him, you received these regulatory documents, your attention was probably automatically drawn to the annual return. Dozens of other useful information can be found in these documents, but we all naturally look for this data as a priority, which is literally obvious, and this, even more quickly when it is negative!
Be warned: in 2022, all asset classes ended with a significant decline, except gold. In this particular context, the bond market and the equity market followed the same trend. Highly correlated and negative for the fifth time in history, these markets led even the most secure portfolios in the red.
Disappointing but inevitable returns?
Thus, even the least daring clients experienced an exceptionally difficult year due to the rise in interest rates which shook the bond market, even though it was associated with the risk-free portion of the portfolio! Traditionally, a balanced portfolio of 60% stocks and 40% bonds has almost always “done the job”. Not in 2022, a year that has one of the worst performances in 150 years. Ironically, some very moderate risk portfolios have even suffered a greater setback than a composite portfolio with more stocks!
On the equity side, the more your portfolio is focused on growth stocks, the more you have seen the value of your investments fall, because this is the asset class that has corrected the most over the year. Furthermore, responsible investors should consider that their negative return will have been amplified, as many funds got away with their positions in non-renewable energy.
Certainly, 2022 is a year to forget. Investors need to look ahead, as history shows that average returns following bear market rallies are often impressive.
See beyond the negative
That being said, the fact that it was, in a way, a must for everyone does not exclude taking advantage of your discomfort to modify your next investments. Receiving your investment statements as of December 31 is the perfect opportunity to stop for a few minutes to understand the construction of your portfolio.
A balanced portfolio should focus on funds with a range of management styles and capitalization sizes. For example, some funds have a much more defensive mandate, others target growth. The funds that may have disappointed you in recent years are probably the ones that have benefited your portfolio this year. Another example: if you have observed a lot of volatility in your small and mid-cap securities, these are surely the ones that will bring you pleasant surprises on the recovery.
In the recessionary environment we are heading into (or may already be in), some companies and sectors are more resilient than others. The selection of securities takes on greater importance in this context, which could require more active than passive management. You will also want to avoid betting on just one industry sector, as none of them react the same way to the stock market cycle.
Maintain investment discipline
As an emotional investor, it is quite normal to have accumulated insecurity in recent months. The question some have been asking for the past year is whether it is wise to continue investing. Sales statistics for products such as guaranteed investment certificates (GICs) in Canada in 2022 are proof of this! With a little hindsight, however, it is more rational to ask whether it is strategic to stop investing by basing your decision on a year like 2022. After all, if we go by the past, such a scenario only happens once every two decades.
It is highly likely that markets will correct again in 2023, especially if central banks add further rate hikes to those already anticipated in market corrections. In the long term, the fact remains that being present on the stock market has always been more profitable than keeping one’s capital safe from risk. The fact of investing on a regular basis, without anticipating the moment when we will reach the bottom of this difficult cycle, is absolutely to remember for the next year.
In conclusion, rather than focusing your attention on the performance of 2022, a year to forget for all investors, shift it to a better understanding of your portfolio. This is the key to mastering your emotions as an investor