To date, 2022 has certainly not been a satisfying year for investors. A sort of perfect storm broke out on the markets with strong falls for both equities and bonds. In the first six months of the year, the MSCI World index lost almost 20%, as did the S&P 500, the leading Wall Street index, which recorded the worst half year of the last 60 years. Global bonds fared no better: the Barclays Global Aggregate index fell by around 15%.
To condition the sentiment are several factors: from outbreak of war in Ukraine due to the further acceleration of inflation. A difficult environment that has prompted the main central banks to abandon ultra-accommodative monetary policies and embark on a cycle of rising interest rates. However, the aggressive stance of the Federal Reserve and other central banks has increased fears of spillover to economic growth prospects and the possibility of a recession it has become very concrete both in the United States and in Europe. S&P Global Ratings speaks of a radically changed macro scenario and the main challenge for central banks is to cope with persistent high inflation without causing a recession.
Defend yourself from the bear
So what are the possible solutions for investing money in 2022? The high risk aversion that characterizes these moments can lead to an excessively prudent investment portfolio. This can be counterproductive in the long run as it risks reducing potential returns and jeopardizing the objective of capital growth and protection from inflation, which in this 2022 is eroding the purchasing power of savers. If you want to achieve results you need to expose yourself to market risk, or the possibility that your investment will temporarily go negative.
During an economic slowdown it is normal for the stock market to have negative periods, which however have a limited duration in time. In the past, the S&P 500 entered the Bear Market 17 times and from the data collected by CFRA Research the bearish phases of the market lasted on average just under a year (11.7 months) with average drops of around 27%.
Investors should therefore try to keep their nerve and make choices not dictated by the emotion of the moment. Warren Buffett, Considered by many to be the most successful investor of all time, he has repeatedly urged not to give in to fear during the chaos of the markets. Indeed, panic-selling can be costly and deprive investors of long-term returns. Value investors like Buffett, on the other hand, see periods of worry and uncertainty as opportunities to buy stocks at low valuations.
Focusing on the long term means continuing to invest or increase, even when the markets are tuned to the downside. Also because statistically the market corrections have always been followed by important phases of rise in equities.
As regards the allocation of the investment portfolio, the prospect of a recession translates into the search for protection by relying, for example, on the money market or government bonds with high liquidity and short maturities. On the other hand, in uncertain periods such as the current one, we can favor those sectors that generally behave better than the market in phases of slowdown or contraction of economic activity. They are the so-called defensive or non-cyclical stocks – such as those in the utilities and pharmaceuticals sectors – which tend to have solid demand and therefore stable earnings and dividends even during an adverse economic environment.
The virtue of diversification
Another pillar of investment choices is an adequate diversification of the portfolio, also focusing on instruments such as ETFs that allow you to take a position on hundreds of equities or bonds, in order to broadly diversify the risk and protect savings from any difficulties of an individual company or issuer.
The core of diversification also consists in having the portfolio distributed among the various asset classes, thus including stocks, bonds, cash and alternative assets. What kind of weight to give to the individual asset classes in the portfolio depends on the risk tolerance, the objectives to be achieved and the time horizon of the investment.