Top Investing Lessons from 2023

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At the start of 2023, investor sentiment hovered near record lows pushed down by a number of weighty concerns: inflation not seen since the 1980’s, skyrocketing interest rates, an ongoing war in Eastern Europe, a consensus view of impending US recession, and dismal market returns in 2022. Yet, when the dust settled on 2023, the S&P 500 had gained over 26%, tech stocks surged well over 40%, and Bitcoin skyrocketed over 150%.

Looking back, 2023 offers some teachable moments that can make us better investors if we pay attention. Here are some key takeaways

Lesson 1: Understand recency bias.

Recency bias describes an aspect of human nature which causes us to place undue weight on recent events when formulating expectations for the future. We expect whatever just happened to keep happening. In the markets, this bias often causes us to be cautious when we should be aggressive, and aggressive when we should be cautious.

Investors entered 2023 feeling defensive after being battered for most of 2022. As we enter 2024, be mindful of how you invest when markets are in rally mode. While individuals are plagued by recency bias, the markets are a forward-looking discounting mechanism, always attempting to anticipate what will happen next.

To optimize your investment outcome, you need to learn to recognize this bias and try to be forward-thinking. In 2024 you may want to consider looking for opportunities arising from the possible reacceleration of global economic activity, the potential for the resolution of one or more of the ongoing global conflicts, and a presidential election cycle that climaxes later in the year.

Lesson 2: Keep an eye on the Fed.

Last year’s large swings in the stock market coincided with changes in the outlook for continued Federal Reserve interest rate hikes. There is no getting around the fact that changes in interest rates have a huge impact on economic activity and security valuation. As the cost of capital increases, doing business gets more expensive and future earnings are worth less.

Last year reminded investors of the importance of understanding the power of the Federal Reserve to move the stock and bond markets and therefore the importance of being aware of what the Fed is thinking at any point in time about the US economy, and inflation.

In 2024, look for the Fed to hold steady on interest rates as inflation remains stubbornly high and business activity surprises to the upside. The consensus view right now is that Powell will begin cutting rates in March, but that is unlikely if economic activity remains stronger than expected in the US.

Lesson 3: Consider passive versus active.

Investing for growth means taking risk, and risk takers by nature like to win. For many, this means trying to pick individual companies or funds we think will outperform. Last year was another disappointing year for “active” equity mutual funds as the majority, around 60% according to Morningstar, underperformed their passive benchmark.

The Garrett Financial Network of registered advisors, dating back to the ‘90s, is one of the first good examples of an alternative investment advisory model in which investors pay advisers a flat hourly rate similar to how an accountant or attorney is paid for professional advice. There are also a handful of firms focused on delivering a similar model institutionally to groups of employees.

Bottom line, US equity markets are growing increasingly efficient and it’s getting more difficult for active managers to justify their higher fees. If you don’t have time to do the research, you’re normally going to be better off going with a more cost-efficient index fund.

Lesson 4: The world is shrinking so stay diversified.

The U.S. represents approximately one-quarter of the world’s economy and just over 60% of the world’s publicly traded stock market. Yet most American investors ignore the rest of the world focusing solely on US equities. Recognize how quickly capital can flow from overvalued markets to undervalued markets and construct an investment portfolio designed for an increasingly global future.

While the US remains the world’s best performing major economy, a strong dollar makes it more difficult to export. Most of the developing world has a meaningfully younger demographic which sets these economies up nicely for future growth. Because it’s normally impossible to predict when the economic winds will change, long-term investors concerned about portfolio volatility should stay diversified geographically.

Looking forward to 2024

2024 holds the possibility to further uncover the potential for artificial intelligence, a technological advancement with the power to increase human productivity, the likes of which we haven’t seen since the invention of the Internet or electricity. At the same time, the world faces ongoing conflict in the form of wars in Eastern Europe and the Middle East, as well as at home in what will undoubtedly be a contentious US Presidential election.

Investors need to stay focused on the opportunities ahead, while remaining diversified to lessen the inevitable bumps in the road. Do not let short-term market swings, and startling headlines designed to generate fear, dissuade you from your long-term investment strategy. Use downturns as opportunities to acquire high quality assets, and leverage market upswings to fund undervalued ideas.

The material provided is for informational purposes only. The information provided is from sources we believe to be reliable, but we cannot guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Francis LLC does not offer personal legal advice.

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