Welcome to the first Informed Decisions article of 2023, hope the year finds you in good form, and excited for the year ahead; here I’ll look at 3 investment lessons to take from 2022!

2022 was a testing investment year for many. Rather than jump headlong into 2023, let’s take a few minutes to reflect and observe what we can learn from 2022! To me, there are 3 main investment lessons to be taken from last year:

1. Inflation continues to be the real risk
2. Diversification matters
3. Embrace uncertainty

#1 Inflation Is The Real Risk

When we invest, we (should) know that there are risks associated with doing so. We know that the value of our investments will rise and fall above and below the amount we invested, potentially quite dramatically. We know that the media will terrify us with headlines any time that investment values fall sharply, even if only temporarily.

Prior to 2021, inflation however was not one of the risks that people were very conscious of! We knew it existed, but inflation had been close to zero % for the previous decade, so consumers and investors were not overly concerned with it.

Despite it’s lack of visibility at the time, for us at Informed Decisions, inflation has always been the biggest risk to people seeking a dignified and prosperous financial life.

Taking an example from our ‘Spice Girls article in 2019 – Inflation in Ireland (when inflation had hit a 7-year high of 1.7%!!):

Imagine it’s 1998, and you have just retired, and are feeling great. You are drawing an income from an ARF, say €1,000 per month. You have a lot of plans for the future and you celebrate with a treat.

And you buy tickets for yourself and your partner to go see the Spice Girls in The Point in Dublin! Two tickets cost you at the time the equivalent of €50. You have a great evening, with a few pints before and after the gig, and sure why wouldn’t you, a pint of Guinness is €2.65 in 1998!

These prices may seem almost comical, however, they are anything but. The fact that 1998 is very recent history goes to show the fact that inflation is something that we might like to think won’t affect us, but we’ll (hopefully) all feel its effect as we grow older into the future.

Fast forward 20 years, it’s 2018 and you are going strong. You have had a superb couple of decades of retirement; doing some part-time roles, working with a few good causes, plenty of recreation, family time and holidays.

Life has been good to you. You hear that the Spice Girls are coming back to Ireland, to Croke Park, and so you go to buy a couple of tickets. Tickets are €75 each, a total of €150. Three times the price. A pint of Guinness is now €5, twice what it was. Nothing criminal going on, just inflation.

If we were to update this little example to January 2023, we’d find that the prices are up another c20% since 2018, due to inflation alone.

To put it in a nutshell, according to the CSO, from November 2021 to November 2022, prices were up c9% in Ireland.

If the vast majority of the assets on which you will rely for financial freedom now or in the future, are not increasing at least in line with inflation (after fees and taxes!), then you are losing and are exposed to a very real and very definite risk. Not only is it a potential risk, it is definite, and you are walking right into it if you are not taking action to avoid it.

Inflation is the real risk; important investment lessons to consider.

#2 Diversification Matters

During 2020 and 2021, many millions of armchair investors made lots of easy money by investing in what everyone was investing in; Facebook, Google, Tesla, Apple, Zoom, Docusign etc!

Just look at Degiro’s map of the most traded stock on their platform, per country, during 2021…Tesla, Tesla, Tesla!

And it’s not difficult to understand why; in 2020, Tesla stock price increased by 743%, versus only 15% increase in a globally diversified equity fund from Vanguard!

It is easy to see why many turned their backs on a ‘boring’ global equity fund, and jump head-long into these miraculous types of individual stocks.

However, in doing so, investors turned their back on diversification. And Diversification is one of the critical aspects of a long-term investment portfolio. But I guess, people who were jumping into the Super Cap company stock weren’t thinking too far into their future, they simply wanted to avoid missing out!

Tesla is by no means a basket case (yet anyway!) and since 2020 is still up multiples, however, 2022 saw Tesla stock value fall 65%. Yes, 65%! If you had €100k invested in Tesla on Jan 1st 2022, your portal account showed your 100k was valued at c.€35k on 31st December 2022. All while, the same Vanguard Global Equity fund was down ‘only’ c.18%.

Diversification doesn’t work every year for every type of strategy. Just look at how Bonds didn’t protect an Equity/Bond portfolio last year, as they have always been expected to do (more on that soon). However, ensuring you do not hold all eggs in one basket continues to be valuable and worthy investment lessons to heed.

#3 Embrace Uncertainty

As noted earlier, a Global Equity fund from Vanguard finished 2022 about 18% down on where it started the year. That is a significant decline, no matter what way you look at it. 2022 was a year of much uncertainty for us long-term diversified investors. However, I argue that that uncertainty ought not have caused any unease for us.

When we recognise and acknowledge that uncertainty is part and parcel, that volatility, both up and down, are the essence of what we sign up to as long-term investors. We then ought to be able to acquiesce about any temporary movements of our values, be they up or down!

To note J.P Morgan’s Q3 2022 Guide to the Markets (Q4 not published as yet), the S&P 500 has had 10 years in the last 41 years where it finished the year down. In addition, on average, it was down every single year by an average of 14% since 1980, yet still delivered 9.8% average positive growth per year in that same period.

Surely that’s the most efficient and enjoyable means in which to invest, successfully and without exhilaration and without fear when the markets rise and falls!?

We want it to be like watching paint dry, don’t we!? If that doesn’t float your boat, then maybe you would be happier joining the brigade buying whatever fashionable stock is the cool kidz are buying today!

In summary, many of our hard-earned investment lessons have been reinforced and reiterated for us. Some new challenges and considerations have been asked of others, and this is healthy too. All for further exploration and discussion.

I hope it helps.

Paddy Delaney QFA RPA APA