As in any area of life, there are generally accepted rules or truths in investing that have stood the test of time.
But the chaos of 2022 has made some people wonder whether these axioms should now be challenged.
One such expert is Fidelity International Chief Investment Officer Tom Stephenson.
“Expressions like ‘timing the market, not timing the market’ have become investment adages because they hold true through the ups and downs of the cycle.” – he said in the UK Telegraph.
“But sometimes, like [former UK prime minister] Jim Callaghan pointed out that there was a major shift in the politics of the 1970s that we can’t do anything about, and which is only very clear in retrospect.’
One such example is 1956, when it was wise to do so for decades bonds were a better investment than stocks.
According to Stevenson, that year Imperial Tobacco’s pension fund manager, George Ross Gooby, dared to make the outrageous claim that the stock had improved inflation– and risk-adjusted returns than bonds.
“He was right, and the rest is market history.”
Stephenson notes with surprise that he thinks 2022 could be another year in which traditional investment wisdom could be shattered.
“Today, in my search for the equivalent of holy cows, I was baffled to learn how many things I could list about investments that I used to believe in implicitly and now aren’t entirely sure about.”
In 2022, bonds performed as poorly as stocks
The first questionable axiom is that splitting your investments between stocks and bonds will minimize volatilitythereby “helping you sleep better at night.”
“This year has been a shocking reminder that under certain circumstances (think high inflation and central banks willing to risk a recession to get it under control), both bonds and stocks can perform very poorly at the same time.”
According to Stephenson, the whole of 2022 has severely tested the previously “encouraging” view that when one of the two assets falls, the other rises.
“Investors who are risk-averse and seek refuge in a traditional balanced fund are perfectly reasonable to ask their advisors what just hit them.”
In 2022, gold prices did not rise
The second idea, which can now be thrown into the trash can gold it is a hedge against inflation.
“This illusion took hold in the 1970s, when the precious metal performed well amid a sharp rise in prices,” Stevenson said.
“But there’s more correlation than causation here.”
The real truth, according to Stevenson, is that gold does better when inflation exceeds interest rates and bond yields.
“Then the metal is forgiven for its most obvious drawback – that it does not generate income.”
Negative return on gold and adjusted for inflation cash are associated with times of rampant inflation — but not always.
“Today’s rapid shift from negative to positive real yields and the associated underperformance of gold this year make the point.”
In 2022, growth stocks lost the battle
More than a dozen years old, tall growth — and especially technologies — shares increased. Many investors and experts attribute this to structural changes in attitudes, priorities and valuation methodologies.
But this year’s collapse stifled the revolution.
“Investors are once again looking for the bird in the hand that less exciting but sustainable cash generators and dividend payers can offer,” Stevenson said.
“Twenty years ago, the dot-com crash reminded us that stocks with low multiples of earnings or assets, or that pay high and sustainable returns, are worth more than the market often admits. I suspect we’re relearning that today.”
In 2022, China has shown that it is not the United States
For decades, investors have viewed the liberalization of the Chinese economy with great enthusiasm.
The prevailing wisdom was that China would emulate the rise of the US and eventually become the world’s largest economy.
But according to Stephenson, 2022 has called into question whether the journey will be that simple.
“Beijing’s recent attitude of prioritizing ‘common prosperity’ over economic growth confirms that China has long since abandoned its slavish adherence to the Western model of development.”
Just a decade ago, the rampant growth of China’s middle class and its voracious appetite for home goods, leisure and financial services looked like a “one-way bet for investors.”
“The bubble, the regulatory squeeze and zeroCORONAVIRUS INFECTION COVID Later politics, everything seems more difficult to navigate.”