2022 has been characterized by tremendous market volatility as investors were faced with uncertainties  brought by interest rate hikes, high inflation, and the prospect of a recession. As the year comes to a close, I think it is a good time to remind ourselves of the lessons that the market keeps teaching.

Lesson 1: Invest for the long term. If your time horizon is only one day, the table below shows that the odds of achieving a positive return in the S&P/TSX composite is around 53%. This effectively means there is a 47% of losing money. The odds of success drastically improve as your time horizon increases. Staying invested for more than five years has historically provided positive returns 100% of the time.

Lesson 2: Even good years have bad stretches. When investors look at historical returns, they may interpret a good year as one that produces a positive return. That said, some investors do not realize that even good years often have negative stretches within the year. The table below shows that from 2000 to 2021, every year that ended positive also had negative periods during the same year. For example, in the year 2000, coinciding with the bursting of the technology bubble, the S&P/TSX had a peak-to-trough decline of 24%, but the year ended with a positive return of 7%. In the year 2009, which marked the bottom of the great financial crisis, the market had a peak-to-trough decline of -20% but ended the year with a positive 35% return. And finally, in the year 2020, the market was shocked by Covid with a peak-to-trough decline of -37%, but the S&P/TSX ended up with a positive 6% return by year-end.

Lesson 3: Diversification. It is easy for investors to look at previously well-performing stocks and chase after the same investments expecting a continuation of the positive trend. However, the table below suggests a different approach. The technology sector was the best performer in 2015 (up 15.6%) but turned out to be one of the worst performers in 2016 (up only 5.2%). The materials sector was the best performer in 2016 (up 41.2%) but also turned out to be one of the worst performers in 2017 (up only 7.6%). Finally, the healthcare sector was the best performer in 2017 (up 34.1%) but performed poorly in 2018 (down 15.9%). Hence, when one simply looks at past performance, there is a great risk that they may be enticed to chase what may actually be “yesterday’s hero.” The mosaic of colors in the table below teaches investors that the prize of being the top-performing sector often changes hands, and diversification and balance could ensure a smoother investing experience.

The above lessons are often well understood by investors; however, amidst market chaos and portfolio volatility, there may be a tendency to forget. Very likely, 2022 is not one’s first experience of extreme market uncertainty, and unfortunately, it will not be the last. If you are a long-term investor looking for ways to navigate the market with a balanced portfolio, please call one of our team members to discuss our strategies.