In early 2023, investor sentiment is hovering near record lows, with inflation not seen since the 1980s, soaring interest rates, continuing war in Eastern Europe, an impending U.S. recession and gloomy markets. This was driven down by a number of important concerns, including the common view that But in 2023, when the dust settled, the S&P 500 index was up more than 26%, tech stocks soared more than 40%, and Bitcoin soared more than 150%.
Looking back, 2023 offered some teachable moments that could make you a better investor if you pay attention.
Lesson 1, Understand Recency Bias. It is an aspect of human nature that we place too much weight on recent events when setting expectations for the future. In markets, this bias often causes us to be cautious when we should be aggressive, and aggressive when we should be cautious.
Therefore, entering 2023, we have taken a defensive stance towards the market. Now we need to be careful how we invest when the market is on the rise. Markets are forward-looking discounting mechanisms, always trying to predict what will happen next without getting caught up in recency bias.
Optimizing investment outcomes in 2024 depends on the potential for a reacceleration of global economic activity, the potential for resolution of one or more ongoing global conflicts, and the presidential election cycle that will peak in the second half of 2024. You may want to consider looking for opportunities. Year.
Lesson 2, look at the Fed. The stock market's big swings last year coincided with a change in expectations for the Federal Reserve to continue raising interest rates. This reminds investors of the importance of understanding the power of the Federal Reserve in driving stock and bond markets, and therefore the importance of being aware of what the Federal Reserve is thinking about the U.S. economy and inflation at any given time. I let it happen.
In 2024, the Fed is expected to keep interest rates unchanged as U.S. inflation remains high and business activity shows an unexpected turnaround. The current consensus view is that rate cuts could begin in March, but that is unlikely if U.S. economic activity remains stronger than expected.
Lesson 3, consider passive and active. Investing for growth means taking risks, and risk takers inherently like to win. For many people, this means trying to pick individual companies or funds that they think will outperform. Last year was another disappointing year, with the majority of “active” equity mutual funds (about 60%) underperforming their passive benchmarks, according to Morningstar.
In short, the U.S. stock market is becoming increasingly efficient, making it increasingly difficult for active managers to justify higher fees. If you don't have time to research, it's usually better to use index funds, which are more cost-effective.
Lesson 4, keep it diverse. The United States accounts for about a quarter of the world's economy and accounts for just over 60% of the world's public stock markets. But most American investors ignore the rest of the world. Recognize how quickly capital flows from overvalued to undervalued markets and build investment portfolios designed for an increasingly global future. Most developing countries have very young demographics, and these economies are well set up for future growth. Long-term investors concerned about portfolio volatility should remain geographically diversified because it is usually impossible to predict when economic winds will change direction.
2024 may further reveal the potential of artificial intelligence, the technological advancement that has the power to increase human productivity since the invention of the internet and electricity. At the same time, the world faces ongoing conflict in the form of wars in Eastern Europe and the Middle East, and a US presidential election that will no doubt be contentious at home.
Investors must remain focused on the opportunities ahead while maintaining diversification to mitigate the inevitable hardships.
Michael J. Francis, President of Francis LLC, is a registered investment advisor and can be reached at: michael.francis@francisway.com.
