2022 was a rough year, to say the least. Amid painful losses in stocks, bonds and cryptocurrencies, investors certainly were provided with plenty of lessons along the way. Accordingly, many may be looking for New Year’s resolutions as a result.
Trading and investing is a difficult endeavor. It’s why so many people choose to “set it and forget it” by investing in index funds. That said, well-timed buys in good businesses can yield stellar returns that outpace the broader indices.
The great thing about investing? We can always learn. There are always different environments to work through, and it takes decades to experience most of those environments — even though they’re rarely the same. For instance, we’re experiencing inflation we haven’t seen in 40 years, and while there are investors out there today who were actively investing in the 1980s, the investing landscape is completely different. Look at tech, for instance.
With all that in mind, let’s look at some New Year’s resolutions investors may want to consider for 2023.
Buy High-Quality Assets
When we look back on the year, it was a brutal run for the stock market. The S&P 500 declined by almost 20%, while the Nasdaq Composite fell 33.1%. However, certain assets held up much better than others.
Old-school technology companies like International Business Machines (NYSE:IBM), Texas Instruments (NYSE:TXN), Cisco Systems (NASDAQ:CSCO) and others all outperformed the Nasdaq. Two out of the three — IBM and Texas Instruments — outperformed the S&P 500. These stocks also outperformed FAANG, while FAANG outperformed many of the high-growth stocks that dominated in 2020 and 2021.
When the going is good, high-growth stocks usually outperform. However, when the going gets tough, investors should focus on cash flow, profits, balance sheet power, dividends and valuation. The point isn’t to buy slow-growth, old-school names. The point is to buy high-quality asset and differentiate between “risk-on” and “risk-off” assets.
Across the board, growth stocks lag on those five factors (cash flow, profits, balance sheet power, dividends and valuation), while more established businesses lead. Of course, even the most established business isn’t immune to macro forces, but this is certainly a factor to keep in mind.
Keep the Proper Perspective
The simple truth is, the stock market tends to do pretty good over the long-term. Over the last 80 years, the S&P 500 has produced an annual gain roughly 80% of the time. How does that apply to today’s market, though?
It doesn’t mean we’re guaranteed to see a positive year in 2023, and it doesn’t mean things can’t get worse from here. What it means is that long-term investors have done well in the market, even when things seem to be falling apart.
That includes during periods such as the roaring inflation in the 80s, the dot-com bust and 9/11 attack in the early 2000s, and the banking crisis of 2008. Even through all of those horrible investing periods, long-term investors came out in the green.
Just to add to the stats, the S&P not only gains 80% of the time (on an annual basis), but the up-years outweigh the down-years as well, with an average gain of 19.6% vs. an average decline of 11.75%.
Lastly, the S&P 500 has only declined in three straight years once (from 2000 to 2002). However, it has rallied in three straight years (or more) 12 times.
So, try to keep some perspective when we do have a down year.
Pay Attention to the Fed
While I can’t emphasize enough that there are externalities when it comes to investing, the Federal Reserve has a lot of control with respect to liquidity and the risk-free rate of return.
Higher returns for risk-free assets (Treasurys) make risk-on assets (like stocks) less attractive. Throw in increased borrowing costs and a recession and one can then see why lower-quality stocks also tend to underperform.
And if that approach doesn’t connect the dots for you, then consider this: Investors enjoyed booming returns off the March 2009 low, as the Fed held a dovish monetary stance for years.
The Fed tried to tap the brakes in 2018 by becoming more hawkish, only for the S&P 500 and Nasdaq to fall 20% and ~24% in about three months. What stopped that decline? A Fed pivot away from that stance.
While 2022 has provided many non-Fed related issues, perhaps the biggest issue for equities has been an aggressively hawkish Fed. When that tone changes, so will the tone of the stock market.
Cash Is King (Or At Least an Option)
This doesn’t need to be a long section. When looking at new year’s resolutions for investors, cash shouldn’t be overlooked, but it also shouldn’t be relied on too much.
To generate strong returns, investors should be invested in assets. That makes sense. But there are times — like in 2022 — where safety and protection take precedence over potential gains.
Cash was one of the best-performing assets in 2022, although inflation did erode some of its value. Still, it’s better than a 20% loss in the S&P 500 or a 33% decline in the Nasdaq.
Further, the dollar, either via the Invesco DB US Dollar Index Bullish Fund (NYSEARCA:UUP) or the Dollar Index (DXY), performed quite well in 2022. At one point, these indices were up more than 20%, but both ended the higher more than 8% higher.
Focus on Sector Strength
Last but not least, pay attention to the leaders! While it’s been a brutal bear market, there are several sectors that outperformed this year.
The Energy Select Sector SPDR Fund (NYSEARCA:XLE) soared more than 57% in 2022. Utilities and Healthcare put up slight losses for the year, while performing quite well over the last few months of 2022. Industrials did very well in the second half of the year too.
My point is, had investors taken a few minutes a week to look at which sectors were performing best, they would have known who the leaders were. Then they could have looked at the catalysts for that performance and, if they utilized technical analysis, examined the trend to see if it was still intact.
Had they done that and hid out in the sectors with the most strength, they likely would have done pretty well in 2022.
On the date of publication, Bret Kenwell did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.