It’s quite an eventful year for the financial markets in 2022. The TSX Index has dropped 16%, while the S&P 500 has fallen into the bear zone, with recession fears looming large. Even the volatility has been so severe this year that the most seasoned investors have felt the pinch.
However, every market cycle has some key lessons for investors. If we try to avoid past mistakes, we will be better investors in the future.
Here are some key lessons this year’s market has taught us.
Asset allocation matters a lot! Investors focus too much on growth and overlook stability. There are numerous stocks with varied risk and return characteristics. So, for example, high-growth tech stocks have substantially underperformed this year, while defensives like utility stocks have beaten them by a large margin.
Thus, it makes sense to have some exposure to slow-growing, dividend-paying stocks, even if you are an aggressive investor. Runaway inflation, coupled with low-growth prospects and rising rates, have notably weighed on Canada’s star growth stock Shopify (TSX:SHOP). It has declined some 80% since last November. However, in the same period, Canada’s top defensive stock Fortis (TSX:FTS) have returned 12%!
So, diversifying across asset classes like equity, debt, and gold is important. However, having varied exposures within asset classes to defensive and high-growth stocks plays well in almost all kinds of markets. Your risk and return requirements will largely determine the prudent asset allocation.
If a prolonged recession is in the cards, safe-haven stocks like Fortis will likely continue to outperform.
Invest in what you know Warren Buffett has always emphasized investing in what you know and avoiding complexities.
Along with an implosion of growth stocks, cryptocurrencies have witnessed an even whopping decline this year. As a result, many digital assets trading platforms and brokerage houses are on the brink of collapse this year. Voyager Digital is one such name that has tumbled almost 99% this year, as the crypto trading platform filed for bankruptcy this week.
Investors jumped on Voyager stock, as it saw an epic ascent early last year. However, very few of them actually looked into how the company makes money. Given the volatility and regulatory concerns surrounding crypto tokens, accepting deposits and lending makes Voyager’s business model highly risky and complex.
Investing is very often simple, but we make it complicated. Perhaps investing in companies of products we use and see every day plays well in the long term. For example, Canadian defensive stock BCE (TSX:BCE) is the biggest telecom company by market cap. Including dividends, it has returned 10% on average annually in the last decade, more than double that of TSX stocks at large.
Do not get out There has been no recession or a bear market in the past when they were not followed by economic expansion and an epic rally. Remember markets and economies work in cycles. So, even if you are sitting on a huge drawdown, averaging into your quality names and bulking up your position makes sense.
Volatility is the fundamental nature of markets. Be it the pandemic or the financial meltdown of 2008, equity markets have seen a remarkable recovery in the subsequent years. The pandemic crash pushed Royal Bank of Canada (TSX:RY), Canada’s biggest bank, stock to its five-year lows in March 2020. However, it soon recovered and almost doubled in the following years. But investors who feared and got out during the pandemic crash missed its big recovery.
The post Key Investing Lessons From the Hot-Blooded Markets of 2022 appeared first on The Motley Fool Canada.
The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends FORTIS INC. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.