The traditional mantra when considering investment strategy is to stay calm, be patient, and in the long term, you’ll see positive returns.
This is a good approach, however, from time to time, a degree of proactivity may also be required.
While discussing his personal management ethos, the World Cup-winning manager Didier Deschamps said: “The key thing is knowing how to adapt. Adapting to the group that you have at your disposal; adapting to the place where you’re working; adapting to the local environment. This is crucial: adaptability”.
Your portfolio is your team, the place may be the markets you invest in or your current financial standing and tolerance to risk, and the environment is recent events and market trends.
2022 was a volatile year for global stock markets and likely led to investors making emotional, misguided decisions.
Here are three ways to help protect your portfolio and avoid harmful investing mistakes in 2023.
3 unexpected ways to protect your portfolio and avoid harmful investing mistakes in 2023
1. Don’t simply rely on historical data and correlations
Historical data and correlations can provide useful insights into long-term market trends. However, overly relying on history to determine your strategy in the present could lead to potentially harmful losses.
Remember: past performance is no guarantee of future success.
In previous years, diversifying your investments across different asset classes may have insulated your portfolio from major downturns as some will have seen positive returns and others negative, likely giving you a more balanced outlook. However, 2022 saw a dip across almost every sector apart from energy.
Similarly, while the Japanese Yen is traditionally seen as a safe haven during periods of market instability, in 2022, the currency bucked the trend and depreciated reaching a 32-year low against the dollar. Meanwhile, the US dollar may have been a better investment option as the currency appreciated over the year.
While it is important to stay focused and remain aware of short-term changes, it is also vital to remember to stay calm and avoid making any emotionally charged decisions.
The theory of loss aversion posits that human beings are hardwired to feel the pain of losses twice as much as the joy of gains. This bias in the face of short-term market instability might push you to convert a paper loss into a definitive one and remove the possibility of your investment’s value bouncing back should markets recover.
However, adapting your investing strategy when necessary could also help you stay on track to meet your long-term goals. It is important to consult with an adviser first before making any major changes to your plans.
2. Consider ways to keep your portfolio well-diversified
It can be easy to think that a good diversification strategy simply involves spreading investments across as many different assets and markets as possible, and in most years, this might be the case.
However, 2022 saw the majority of global markets and major asset classes produce negative returns.
So, taking the time to reconsider your approach to diversification for 2023 may prove beneficial.
This may involve putting in the extra time to research specific companies that are seeing stable or positive returns in each market that you choose to invest in or diverting a larger share of your investments towards the stock indices or currencies that are seeing the best annual returns.
You may want to reflect on current events and how they may affect businesses.
It might not be a wise move to attempt to predict the market but taking note of short-term trends, such as the performance of energy companies during a global energy crisis, could help guide some smart investing choices.
Another psychological bias, known as “familiarity bias”, can see investors favour a tendency to trade in assets they already know, and leave them susceptible to ignoring the whole range of diversification possibilities available to them.
Any changes you might decide to make to your portfolio don’t necessarily need to overhaul your entire approach, but rather adapt it slightly to better navigate short-term issues.
3. Think about how your investment strategy aligns with your long-term goals
At the end of the day, whatever approach you decide upon, it needs to align with your personal long-term goals.
If you only need a return of 2% a year to reach your goals without running out of money, you are unlikely to want to take on additional risks and will probably be content with riding out short-term issues in the hopes of long-term positive returns.
However, being overly cautious may hinder your long-term plans as some degree of risk will likely be required to generate the funds necessary to fund your dream lifestyle.
Taking a more active investing approach and pursuing riskier investment choices could see you generate greater positive returns, but it also may leave you facing up to potential losses.
One particular bias that may leave you vulnerable to risky investments is “herd mentality”. Herd behaviour happens when investors opt to follow the consensus of others rather than making their own informed decisions.
For example, if your friends and loved ones are all investing in a certain trendy stock, you may end up overvaluing its worth and underestimating its risks.
It is important to take a step back and view your investments logically rather than emotionally and avoid any potential psychological effects on your decision-making process.
Remember: it all depends on your personal circumstances, needs, and tolerance for risk.
Get in touch
The unusual circumstances surrounding 2022 can provide some valuable investing lessons beyond the traditional rhetoric. However, it’s important to make sure that whatever strategy you adopt, it is tailored to your tolerance for risk and is designed to meet your long-term goals.
A good first step might be seeking advice by emailing info@lloydosullivan.co.uk or calling 020 8941 9779.
Please note:
Investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.
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