Happy New Year!
I am glad to say goodbye to 2022. What a year it has been for savers and investors.
The high inflation was bad for savers, and the market downturn was bad for investors. Almost every type of investment was down.
However, 2022 did offer some useful investing lessons.
Diversification does not matter, until it does!
For many years it was fashionable (and profitable) to invest in high-flying stocks and meme stocks. Diversification was out of fashion.
Diversification means investing in multiple stocks so that no one single stock can negatively impact your portfolio. The easiest way to diversify is to buy all the 500 companies in the S&P 500 list using a low-cost ETF like VOO.
The below graph shows the risks of not being diversified. Investing in risky stocks like Carvana can be great when markets are going up. But when markets went down in 2022, Carvana lost 98% of its value!
And it was not just stocks of smaller companies that took a hit. Even stocks of trillion-dollar companies like Facebook (Meta) fell a lot.
Regular investing can make bad markets less bad.
Even a diversified investment like S&P 500 was down 20% last year. However, if you have been investing regularly every month, then you managed to keep buying even when the market was falling. So you bought during some of the lowest months of the year. As a result, you ended up with just a 7% loss for 2022!
This is called dollar-cost averaging.
Although a 7% loss still hurts, it is much better than most other assets.
In Conclusion
No one knows if 2023 will be better or worse than 2022.
What I know for sure is that at some point, the market will stop going down and start going up. I will continue to use my strategy of investing regularly. Although stocks may not look great right now, they are still the best game in town for long-term investors.
Looking forward to a better 2023…
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