Published on February 18, 2022
2022 has been off to a challenging start. You’re not alone if this is reflected in your investment portfolio. However, it’s important to be patient and stay the course. 2021 taught us many investing lessons, but the biggest takeaway is that investors must stay calm amid market volatility and uncertainty. This will continue to be a critical strategy as we navigate investing trends for 2022.
By understanding the current state of the market and the potential pitfalls in the road ahead, investors can be more prepared to weather the storm. Keep in mind that a steady, disciplined approach to investing can save you time and money in the long term. However, this is easier said than done with the market is as tumultuous as it has been for the past two years. Read on to learn more about the current state of the market, future outlook as predicted by economists, and how to remain calm and stay the course amid this situation.
In many ways, we are only now seeing the true effects of the pandemic on the economy and how they will shape investing trends for 2022. Supply chain disruptions and increasing costs in energy have resulted in widespread inflation. Many are hopeful that inflation will wane as supply chain disruptions resolve and monetary policies are adjusted, but others believe the worldwide supply chain will take several years to return to normalcy.
As the global economy recovers from the pandemic, rising demand combined with supply constraints is driving inflation to new highs. As a result, central bankers, who oversee each country’s currency and monetary policy, are acting. There are predictions that the Federal Reserve will hike interest rates multiple times in 2022, which will undoubtedly have significant impacts on the global economy. The United Kingdom, South Korea, New Zealand, and Brazil raised interest rates in 2021.
There are a few investing trends that show more promise than others this year. Sustainability investments, like renewable energy, ESG (environmental, social and governance) themes or green finance (such as green bonds), have seen fairly steady growth over the past few years. With the COP26 (26th UN Conference of the Parties on Climate Change) conference in Glasgow, Scotland, providing the world with a snapshot of progress being made across several sustainability issues, investment managers will be eager to push ESG themes further as part of their fund-allocation processes. Other examples of areas expecting growth include Artificial Intelligence (AI), cannabis, and electric vehicles.
Technology, however, has seen a downturn early in the year. Economists blame exaggerated valuations and rising interest rates for this trend. These two causes have thrown the popular sector into a downward spiral after a long period of outperformance by technology stocks. Since its peak on Jan. 3, the Technology Select Sector SPDR Fund (XLK) has lost 11.8% of its value. Many felt that the technology sector was overvalued in 2021 and that this correction was inevitable.
Does this mean that investors should abandon technology investments entirely? As a blanket statement, no. The market has faced turbulence before and recovered, and it is likely best to stay put. Of course, specific advice from a financial adviser is the best way to navigate your unique situation.
Staying the Course
The best advice for investors amid this turmoil is to remain calm and stay the course. Remember that the economy was considered overdue for a correction and this isn’t the first or last time we’ve seen similar trends. When dividends are factored in, the S&P has risen 72% of the time year-over-year since 1926. Trying to time the market is rarely a successful strategy, even for the most talented investors. It’s generally more beneficial to be patient and focus on a long-term investing strategy, especially if you are working without the guidance of a financial planner’s services.
Many stocks have experienced volatility only to recover. Semiconductors, for example, are typically a volatile group of stocks. Over the last five years, they have outperformed the general market, but the daily grind, especially during moments of increased overall market volatility, is not for everyone.
Your investment strategy must be custom-tailored to your lifestyle. For example, many investors aren’t sure whether to put more emphasis on value stocks or growth stocks. Unfortunately, there is no clear-cut answer (which is why working with a financial professional is ideal). Because of their long-term potential, growth stocks are likely to beat the market over time. Value stocks are assumed to trade at a discount to their true value, implying that they will produce a higher return in theory. Studies of historical performance show that short-term investors may have better luck with growth stocks, but value stocks outperform in the long term. Ultimately, as with all investment decisions, the right answer depends on your personal risk tolerance and overall strategy.
Concentrate on the aspects of your financial life over which you have control, such as maintaining a well-balanced portfolio, keeping your investment fees low, and increasing your savings. If you’re ready to get started, contact me today.