Written by Alex Seleznev, MBA, CFP®, CFA | Jan 10, 2024
Even though each quarter of 2023 presented some unique challenges, the year turned out to be positive for the stock market, with the S&P 500 index up by more than +26%.
It is hard to recall a single market commentator or pundit who predicted results of this magnitude at the beginning of the year.
This is common because, as the physicist Niels Bohr (though some would argue it was baseball legend Yogi Berra) famously stated: “Prediction is very difficult, especially if it’s about the future.”
Below are the five lessons we re-learned in 2023.
1.) Volatility is the Price of Admission
The prize is superior long-term returns. You can’t escape the volatility, but you can and should manage for it.
If you are prepared and willing to tolerate the risk, it’s worth sticking with quality growth investments instead of defensive stocks.
The year 2023 was not short on market events. From the banking “crisis” and potential debt default in the U.S. to the continuation of tensions in Eastern Europe and a new flare-up in the Middle East, there was no shortage of attention-worthy events.
The markets are volatile and ever-changing.
2.) Ignore the Predictions
Depending on your perspective and level of market involvement, this might be the easiest or the hardest thing to do.
Remember the army of economists discussing the probability of a hard versus soft landing for the economy in 2023? It was not a matter of if, but when. The markets didn’t seem to care.
You need to have a plan that addresses different scenarios and matches your long-term investment needs.
3.) Markets Do a Good Job of Discounting the Future
While market strategists struggle with price predictions, markets are actually quite good at discounting the future.
The S&P 500 index turned lower nine months before earnings began to fall, and then bottomed about nine months before earnings growth turned positive again.
This happened despite the predictions and recession talk.
What’s the lesson here? There is something to be said about being contrarian, but your opinion needs to be based on facts and solid analysis.
4.) Companies Can Be Over-Concentrated
Don’t put all your eggs in one basket. This is one of the best ways to describe the idea behind portfolio diversification.
One of the biggest events of 2023 was the collapse of Silicon Valley Bank (SVB) in March. There were many lessons to learn from this.
Looking back, it’s worth highlighting one aspect of this story: SVB almost exclusively served technology companies in California, as well as their employees. When the tech sector experienced a downturn, companies and employees started drawing down on deposits.
This resulted in a run on the bank, compounded by the fact that the bank’s assets weren’t as liquid as they should have been.
This ultimately led to the collapse of the bank. But, even if the bank hadn’t collapsed, its business would have been severely impaired because it was so reliant on a specific market.
The same is true for portfolios that are overly concentrated in only a few sectors or industries. It is just a matter of time before you experience troubles.
5.) Great Companies Continuously Reinvent Themselves
Betting on an overvalued stock to decline is very hard.
As the famous economist Maynard Keynes noted, “The market can stay irrational longer than you can stay solvent.”
The idea opposite to this quote is also true, at least to a degree.
Certain companies can continuously improve and remain at the top of the public’s attention.
The “Magnificent 7,” as many call the top-performing stocks of 2023, mostly in the technology sector, are a good example of this common phenomenon.
If you happen to have some of these stocks in your portfolio, you certainly need to have a clear strategy to manage the risks without relying too much on your gut feeling, which can be dangerous in the world of investing.