Behavioral Finance Video:
3 INVESTMENT LESSONS FROM 2022
1st Lesson – Surprises Happen
In 2022, we were surprised by the Russian invasion of Ukraine. We also experienced record high gas prices.
In response to persistent inflation, the Fed increased interest rates significantly. This resulted in mortgage rates doubling and both stocks and bonds experienced double-digit losses for the year.
2nd Lesson – Expert Forecasts are Notoriously Inaccurate
At the beginning of 2022, fourteen well-respected financial firms submitted their prediction for how the markets would end the year. Their forecasts for the S&P 500 Index were all over the place, some forecasting as low as 4400 to as high as 5330.1
The expert consensus estimate among several market experts was 4950.2
The market ended the year at 3840. Not Even Close!
3rd Lesson – We Can’t Predict nor Control Volatility
One measure of volatility is how often the markets move one percent (or more) in a day. In 2017, it only happened 8 days throughout the year. In 2022, it occurred 129 days…over 50% of all trading days. For the year.
We can’t control how volatile the future will be, but we can control how we will respond to it.
For example, let’s say Bob and Julie each purchase the same stock at $10 per share.
One year later they sell it for $12 per share. Same security, same return, but they had a totally different experience.
Bob constantly tracked the performance of his investment, experiencing all the volatility of the security. Julie never looked. She bought it and sold it. The volatility Julie experienced was significantly less than Bob.
Three Lessons to Remember in the Future
- Going forward we should expect to be surprised
- While forecasts may be alluring, they are often misleading
- Ultimately, it’s not about market volatility. It’s about how often we look and how we respond to it
©2023 The Behavioral Finance Network
1. Jonathan Ferro on Twitter (@Ferrotv), January 3, 2022
2. Rosenberg Research
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