Many investors were glad to see the end of 2022. But what’s ahead this year? And what moves can you make in response to last year’s results?
To begin with, here’s what happened: 2022 was the worst year for the financial markets since 2008, with the Dow Jones Industrial Average dropping nearly 9%, the S&P 500 losing more than 19% and the technology-heavy Nasdaq falling 33%. Several factors contributed to these results, including the moves by the Federal Reserve to aggressively hike interest rates to combat inflation, the Russia-Ukraine war, recession fears, and increased concern over COVID-19 cases in China.
However, 2023 may be different. Many experts believe that inflation may moderate considerably, especially during the second half of the year. If that happens, the Fed may well pause its interest rate hikes and perhaps even consider cutting rates, a move that is often positive for the financial markets. Also, if a recession emerges, but it’s relatively short and mild, as expected, the rebounding economy may be favorable for the investment outlook.
Regardless of what transpires this year, though, you can help move toward your financial goals by following some basic steps that make sense in all investment environments. Here are a few to consider:
Focus on the long term. It can be disconcerting to look at investment statements containing negative results, as was the case for many people throughout 2022. But it’s important to view a single year’s outcome in the larger context, and historically, the stock market has had many more positive years than negative ones, though, of course, past performance is not a guarantee of what will happen in the future. In any case, it’s generally not a good idea to overreact to short-term downturns and make moves that could work against your long-term strategy.
Keep adequate cash in your portfolio. The value of your investments may have gone down in 2022 — but you didn’t really sustain any actual losses unless you sold those investments for less than what you paid for them. To avoid having to sell investments to supplement your income or to pay for unforeseen costs, such as a major home or car repair, try to build the “cash” portion of your portfolio, so it covers a few months’ worth of living expenses. When you’re retired, and it becomes even more imperative to avoid selling investments when their price is down, you may need an even bigger pool of available cash.
Look for opportunities. Although 2022 was certainly a down year for the financial markets, some developments have presented new opportunities for investors. For one thing, the contribution limits have increased for IRAs, 401(k)s, and Health Savings Accounts (HSAs), all of which are pegged to inflation. Also, with interest rates considerably higher than they were a year ago, fixed-income investments may offer more income and provide added stability in portfolios during times of economic weakness.
When you’ve been investing for a long time, you will experience down years in the market, such as the one in 2022. These years are an inevitable part of the investment process. But since you can’t control what happens in the financial markets, you need to concentrate on what you can control — and that may be a lot more than you think.
This article was written by Edward Jones, Member SIPC