The Most Valuable New Year’s Resolution You’ll Make In 2022

The Most Valuable New Year’s Resolution You’ll Make In 2022
Stéphane Renevier, CFA

about 2 years ago4 mins

  • Start 2022 by asking yourself how you’ll handle choppier markets: are you ready to handle a bumpy ride, or will you try to benefit from higher-volatility opportunities?

  • Then assess whether you overly rely on stocks to generate your returns. If you do, you might want to look at including other asset classes in your portfolio.

  • Last, you should ask yourself what you can do differently this year, trying to fix your weaknesses and play to your strengths.

Start 2022 by asking yourself how you’ll handle choppier markets: are you ready to handle a bumpy ride, or will you try to benefit from higher-volatility opportunities?

Then assess whether you overly rely on stocks to generate your returns. If you do, you might want to look at including other asset classes in your portfolio.

Last, you should ask yourself what you can do differently this year, trying to fix your weaknesses and play to your strengths.

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If 2021 provided a great environment for most financial markets, things look set to get a lot trickier in 2022. So as you take your first surreptitious steps into the new year, there’s one resolution you could make that should help you come prepared: ask yourself a few simple but significant questions…

“How will I handle choppier markets?”

There are a lot of reasons markets might enter a higher-volatility regime in 2022: valuations are high, inflation risks are much stickier and higher than expected, the Federal Reserve has started to tame its generous monetary policy, and markets have already priced in a lot of the strong post-Covid recovery. Put simply, markets may well go higher, but the rising downside risks mean investors should expect a bumpy ride.

If you’re a passive investor, that means two things: don’t expect the easy returns you might’ve achieved over the past three years, and do expect to suffer much larger losses than you’re accustomed to along the way. Knowing what and what not to expect is key, as it’ll keep you from selling your investments at the worst possible times. So make sure you have both the psychological and financial capital to handle losses, and if not, make adjustments to your portfolio before it’s too late.

For active investors, it means being prepared to take advantage of the opportunities created by higher volatility. If you have a long horizon, you might want to create a watchlist of stocks to buy for the long term should prices drop to more attractive levels. If you’re a shorter-term investor, you might want to look at long-short trades: buying value stocks and selling growth stocks, buying international stocks and selling US stocks, or buying one sector versus another. Investors who believe they have an edge will be presented with a unique opportunity to demonstrate it.

“How much am I relying on stocks to generate returns?”

If you’ve held stocks (particularly growth stocks) over the past three years, you’ll have done incredibly well. But relying too heavily on a single source of returns might be dangerous over the long term. Given how elevated stock valuations are, you’re unlikely to make as much as you have done recently.

Of course, that’s not to say you have to ditch stocks: they’re one of the highest-returning asset classes over the long term, after all. But too many investors allocate to stocks simply because that’s what they’re most comfortable with, rather than because it’s the asset class they have the strongest conviction in.

Sure, Tesla did well this year, but so have other assets like oil or bitcoin. What I’m saying is that there could be a lot of value learning about other asset classes. In today’s markets, investors who master multi-asset investing are at a huge advantage to those who don’t, and the best way to learn is arguably to have some skin in the game. So a great way of starting the year could be to add one or two non-stocks investments to your portfolio. You might be surprised at the amount you learn – and how much it might help your stock portfolio.

“What can I do better this year?”

The best investors constantly work on improving their investment processes and learning from their mistakes.

The first step is to review all your past buy and sell decisions, and try to uncover any pattern that may be keeping you from performing better. Maybe you have a tendency to wait too long before entering a trade, and hence miss a large part of the gains. Maybe you’re not aggressive enough with your selling decisions and tend to give up too much of your profit. If you can fix your weaknesses and play to your strengths, you’ll already be a long way to becoming a better investor.

The second step is to start developing better habits. One way is to use checklists: writing up behavioral rules (like “I can honestly say I am not buying on FOMO”) and fundamental rules (like “I can clearly explain my investment thesis and the main risks to it”) will make it much more likely that you develop a more robust investment process and, more importantly, that you respect it.

Another way is to write an investment journal. By frequently writing down your thoughts on markets as well as on each of your investment decisions, you’ll be able to better pinpoint what you do right and wrong. When compounded over time, each of these small learning experiences will help take your investment game to the next level. More importantly, they’ll also help you focus more on the process rather than the outcome. And in a situation where chance plays such a big role, that might just be the difference between failure and success.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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