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By Jessica Wee

If in 2022 you invested based on the lessons learnt from the history of the financial markets, you would have been left with disappointment. Let’s move forward and discuss the mistakes that we should not repeat in 2023.

Keep in mind, even though lessons on how investments have behaved over the decades are valuable, they don’t always work. 

Here are four mistakes we should avoid in our investment portfolio planning for 2023.

1. Relying only on historical correlations 

When you look at a fund factsheet, there is always an exemption clause which says ‘past performance does not indicate/guarantee future performance’. This clause accurately explained what happened this year.

The first mistake to avoid, is relying exclusively on historic correlations. Also, keep in mind that diversification isn’t solely about how far two asset classes move in different directions.

Some analysts suggest looking for “diversifying fundamentals,” not just “negative correlations.”

This means that the correlations between the industrial sectors were all positive in 2022, but the energy sector had positive returns unlike the others. Having the energy sector in your portfolio would have provided one of the best diversifications in 2022 to provide a softer landing for your portfolio.

The same applies to the US dollar: it is true that Treasuries have fallen in the last year, but the US dollar has appreciated greatly due to the differences in the ways and times of monetary policies between the Federal Reserve and the other main central banks.

2. More investment = more diversification

The second mistake we must avoid in 2023 is thinking that adding more asset classes will increase the diversification of our portfolio.

In 2022, the only asset classes that have delivered positive returns are the energy sector, the US dollar and some “niche” markets such as Brazilian equities.

3. No one has a crystal ball!

The third mistake is trying to predict the future.

Central banks have powerful systems for making economic predictions and they are often wrong. Can we do better? Probably not.  

It’s better to spend your time more productively building a robust portfolio in which you have different asset classes. With that, you will be able to withstand different market cycles without compromising your long-term performance.

A cocktail of assets, such as real estate, equities, long-term investments, etc., in your portfolio creates a system where you are continuously earning returns but also allows you to redistribute your fund allocation based on market performance.

4. Attach emotions to investing

Successful investors, like Warren Buffett, have mastered the art of detaching their emotions from their investments. Their investment decisions are always in line with their overall investment ideology, regardless of the sway of the market. As most people would like to say, emotions can be fickle at times and can lead to barely thought-out decisions. Resist the urge to panic buy or sell with every movement of the market; make your investment decisions or move on the foundation of researched information, asset performance history and in line with your financial goals.

Tips to Avoid Investment Mistakes

Here are some tips to help you avoid common investment mistakes:

  • Think about investments in a way that is consistent with your goals.
  • Take into account the beta (indicator of sensitivity to market fluctuations): a high beta means greater volatility and therefore risk.
  • Look at investment fundamentals. Early 20th century, global indexes were composed mainly of financial stocks and rail transport, today technology and telecommunications dominate. This makes the fundamentals completely different.
  • Prepare for different market scenarios and accept uncertainty. 

In setting your investment strategy for the coming year, it is important to consider the following questions:

  • What were my financial goals and investment strategy for 2022?
  • Did my investment strategy work?
  • How has my financial situation improved or declined?
  • What are my long or short-term financial goals?
  • Does my investment strategy need tweaking?

Investing comes with a risk of loss and you don’t want to end up reducing your net worth by making investing mistakes.

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