December 15, 2023
At the start of this year, the economy and global markets were in a precarious position. After a year of negative returns in 2022, inflation was close to record levels in most developed markets, and interest rates had been increased to fight this dangerous enemy.
Having just come out of the pandemic, investor sentiment was low. We know from our conversations with clients that the mood was not optimistic. And so, with another 12 months having flown by, what are we to make of the year that has almost been consigned to the record books? Before we busy ourselves with the holiday period, we reflect on three lessons we’ve taken from 2023.
Sideways Markets Require Patience
While a sharp market decline can frighten investors, a market that trends sideways for long periods can wear otherwise resilient investors down through sheer fatigue.
Over the last two years, some global markets have reached the same level more than 15 times. In these circumstances, it can be tempting to want to make changes, especially during a season where cash accounts have provided attractive short-term returns.
Investors who have remained invested in their well-constructed long-term portfolios have shown a lot of patience but are in the process of being rewarded. After a year of negative returns in 2022, it looks likely that 2023 will end with a healthy return for long-term investors.
Patience and discipline are always easier to espouse when they aren’t needed. The last two years have separated those with real discipline from those who require immediate gratification.
A Margin of Safety Is Valuable
Rising inflation and interest rates have been a global theme for two years. The consequences of higher mortgage costs and cost of living adjustments have placed many households under pressure.
The families who had access to a margin of safety, either through cash savings or living below their means, have been able to endure this season with more comfort. It may seem like an opportunity cost to maintain a margin of safety during good times, but the benefits become more apparent during more challenging times.
As Warren Buffett said, “Only when the tide goes out do you learn who has been swimming naked.” We encourage you to maintain a margin of safety and benefit from the peace of mind it will provide you in all markets.
The World Is Noisier Than Ever
In 2023, we again moved from one news story to another at breakneck speed. We’ve seen the acceleration in the AI revolution (sparking fears about the implications), briefly faced the possibility of a widespread banking crisis, lost interest in one war to focus on another, and watched as Prime Ministers worldwide resigned.
While being informed about the world around us is sensible, we’re always in danger of losing sight of more important things. Our time is short, and there will always be another distraction. We encourage you to tend to your own garden in 2024. The battle for our attention is fiercer than ever, and the value of an undistracted hour is more valuable than ever.
Rest assured that if there are important matters relating to your money, we will make these known to you.