Market Perspective: There are No Rewards Without Risk
- 2022 reminded investors of the risk from investing, but none of this makes losses palatable.
- As the old axiom goes, “there are no rewards without risk”.
- It’s tired wisdom, but “staying the course” is the most critical activity you can do now.
2022 reminded investors of the risk from investing. We know from history that the stock market tends to fall around one in every four calendar years, but none of this makes losses palatable. This may feel particularly punitive for new investors, who have become accustomed to markets climbing a wall of worry—often brushing off economic and political concerns to reach new heights. However, this all changed in 2022 following a significant rise in inflation and the subsequent shift in central bank policy. Chief among the challenges were multi-decade high inflation and persistently low unemployment, leading to rising interest rates and a swift retreat in the amount investors were willing to pay for assets.
As the old axiom goes, “there are no rewards without risk”. Or to put a finer point on it, clients must acknowledge that their portfolio won’t move in a straight line unless they want sub-par outcomes over the long run. It is no secret that both stocks and bonds struggled in 2022, except for a few rare winners like energy-related assets. It’s tempting after a year like this to hunker down, close the eyes, and put the head in the sand. Or conversely, you may find yourself actively seeking revenge, fighting against the conditions and overtrading. In investing, this can lead to all sorts of errors—pausing contributions, not funding new goals, or even pulling out of the market.
It’s tired wisdom, but “staying the course” is the most critical activity you can do now. That means continuing to contribute, funding new goals, and investing in a desirable mix of assets that put the probabilities of success on your side. This holds regardless of whether a recession is on our doorstep. Of course, some investors will be impacted, whether via job layoffs or a cost-of-living squeeze, which may require changes, but for most, sticking to the plan is key.
From an investing discipline perspective, we’d like to reframe 2023 as opportunity. It is easy to source negative news, but we are seeing substantial positives, too. As we head into 2023, yields are higher, meaning you get more income from your investments that can be used or compounded. Valuations are also lower, so you’ll be paying less for the attractive fundamentals of assets. All this amounts to one thing: the overarching conditions are potentially lining up for better long-term outcomes, helping you reach your goals.
Of course, this doesn’t mean we’ll avoid any pain from here. As we’ve established, markets don’t move in straight lines and few assets are unusually cheap. However, we are optimistic over the longer term—five or 10 years—where we believe investors will be better off given the improving yields and valuations.
So, for investors of all types, we hope you’ll be inspired by the possibilities of this year. We certainly feel this way and will continue to work in earnest—finding undervalued assets and professionally managing portfolios that are designed to deliver on your goals. Thanks for your business in 2022.
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