Which Portfolios Did Best In 2022?
In 2022, a global earthquake hit the world’s financial markets. If portfolios were people, the hospitals would be full. But which portfolios did best? Before awarding “top honours” let’s take a quick trip to the morgue.
Here lie casualties that too many people loved. The crypto brokerage service Voyager Digital, filed for bankruptcy in July. Crypto exchanges FTX and FTX.US perished in November. BlockFi is stiff with rigor mortis. Three Arrows Capital, a crypto hedge fund, filed for bankruptcy too. Some believe the founders hid in a swamp for three weeks.
Leaving the morgue, we head up to the hospital’s Intensive Care or Critical Care Unit. Here, we find undiversified investors foiled by crypto currencies. Last year, Bitcoin plunged 65.31 percent. It will need to gain 188 percent to break even from that drop.
Non-diversified investors in the once manically popular ARK innovation ETFs are also in Intensive Care. A few years ago, Cathie Wood, the 60 something year old, soon-to-be celebrity fund manager, stuffed her ARK funds with companies that (in most cases) hadn’t earned business profits.
I explained this for The Globe and Mail at the height of ARK-mania. Investing in these things was like running a tightrope with a fridge.
Cathie Wood’s flagship, ARK Innovation ETF (ARKK) dropped 67 percent in 2022. It will require a gain of 203 percent to break even from that drop. But don’t hold your breath. It’s still mostly stuffed with companies that don’t make profits.
Leaving the Intensive Care sections, you’ll find reams of investors in regular hospital beds. Those in the roughest shape were, once again, not diversified. Many bought the previous year’s hottest stocks.
Tesla and Meta Platforms (Facebook) each plunged about 65 percent in 2022. They’ll need to gain 186 percent to break even from that drop. Amazon and Netflix shares each plummeted about 50 percent. They’ll need to double to get back to last year’s level.
We also hear crying from other beds. Plenty of these investors might have been diversified, but they chased hot stocks, dabbled in crypto or fell for managed funds that had (before they bought them) recently done well.
After leaving the hospital, we notice several investors chatting in walk-in clinics. They have globally diversified portfolios of index funds or ETFs. Say what you want about bonds this year, they didn’t fall as far as stocks. And this helped keep portfolios out of the hospital and the morgue. Measured in USD, portfolios comprising 60 percent in a global stock ETF, such as Vanguard’s Global Stock Index ETF (VWRA) and 40 percent in a global bond ETF, such as the iShares Core Global Aggregate Bond ETF (AGGG), dropped just 15.96 percent last year. Such investors will need to gain 18.84 percent to break even from last year’s drop.
This brings us to investors playing tennis or walking around the park. They have the odd bruise. But other than that, they’re fine.
They own globally diversified ETF portfolios with a value stock tilt, much as I described in my Swissquote article from April 2021.
For example, a portfolio comprising 60 percent in the iShares Edge World Value UCITS ETF and 40 percent in the iShares Core Global Aggregate Bond ETF dropped just 12.4 percent in 2022. Such a portfolio would only need to gain 14.1 percent to break even from its level in January 2022.
Smart investing isn’t about predicting the next hot sector. Almost nobody has done that twice. Instead, we should embrace economic science. Whether you own a diversified portfolio of regular ETFs or a portfolio of ETFs with a value stock tilt, you’ll stay out of Intensive Care.
You’ll also thump the long-term returns of almost everyone you know…especially those who were chasing what was hot.
Shunning Diversification And Chasing Popularity Digs A Really Deep Hole
|2022 Return||Gain Required To Break Even From Last Year’s Drop|
ARK Innovation ETF (ARKK)
Meta Platforms (Facebook)
Global Stock Index
60/40 Global Stock and Global Bond ETF Portfolio
60/40 Global Value Stocks and Global Bonds
Measured in USD
Andrew Hallam is a Digital Nomad. He’s the bestselling author Balance: How to Invest and Spend for Happiness, Health and Wealth. He also wrote Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas
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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.