The year 2022 was a rocky one for investors, with markets swinging wildly in response to a variety of factors such as war, spiralling inflation, and monetary tightening.
As a result, it was a challenging year for many investors, who found themselves on the wrong side of the market's movements. However, despite the hurdles, there were also valuable lessons to be learned from the events of 2022.
By understanding and internalising these lessons, investors can improve their decision-making and increase their chances of success in the markets.
1. Hold On: Time is Money
The year was divided into two halves - the first half saw a sharp decline of 14%, which was followed by a sharp rally of 17%.
If you got discouraged by downward trends in the first half, or panicked because of all the bad headlines, and sold off, you would have missed on the rally in the second half of the year.
If you just held on through the year patiently, you’d have ended up at least saving your capital if not making a profit.
2. Reality of Volatility
One of the most important lessons from 2022 was the fact that volatility is simply a part of the nature of equities. No matter how carefully you choose your stocks or how diligently you follow the markets, you can't avoid the fact that the value of your investments is going to fluctuate.
For example, in 2022 the markets moved in a 30% range through the course of the year. For a meagre 3% return at the end of the year, the range of movement was super high. Any mistakes around trying to time the market, or interference of emotional biases in decision-making could have resulted in terrible mistakes.
Volatility needs to be accepted as a given in equity investing. A strong focus on the long term helps sail through volatility.
3. IPO Fever: Don’t Catch It
2022 showed that not all initial public offerings (IPOs) are money-making machines. In truth, some IPOs are basically a mechanism for firms and promoters to capitalize on investor optimism and sell shares at inflated prices.
For example, many fin-tech companies like Zomato, Paytm, Nykaa etc. listed in late 2021 had poor performances and destroyed investors' wealth. This means that it's important to do your due diligence before investing in any IPO and be sure to consider the company's fundamentals, not just the hype surrounding the offering.
Don't get caught up in the hype of an IPO and blindly buy shares, make sure to do your own research and ensure that the company is a good investment.
4. Eternal Ebb and Flow
Another important lesson from 2022 is that neither bull markets nor bear markets last forever. This means that it's important not to get too caught up in the hype of either a bull market or a bear market.
For example, investors who bought stocks in early 2022, thinking that the bullish market trends that started in mid-2020 and continued till late 2021 would spill in through 2022, found themselves on the wrong side of the boat.
Instead, focus on your own investment goals and objectives, and make decisions based on the fundamentals of the companies you are invested in. Don't get caught up in the hype of a bull market and over-allocate to stocks, and don't get too bearish during a bear market and sell off all of your stocks.
5. Balance is Beautiful
Finally, 2022 reminded us that asset allocation matters. Many investors learned this lesson the hard way, as they piled into stocks and ended up with an overly concentrated portfolio that left them vulnerable to market downturns.
An asset-wise well-allocated portfolio may not see dramatic returns in the short run but will protect you from landslides in any one asset type. And in the long run, you can watch your money multiply.
However, as the world entered 2022, stock market participants were again reminded that asset allocation matters in the end. Instead, it's important to consider your risk tolerance and allocate your assets accordingly, with a mix of stocks, bonds and commodities.
In the End
These are some important financial lessons that 2022 imparted to us. Investors should never lose sight of the fact that the markets will continuously try their patience, but that their conviction to hold onto stocks will pay off.
Therefore, it's crucial to improve one's decision-making and investment process in order to prevent repeating these errors!