3 investing lessons from 2022

2022 is a challenging year for investors. Unless you’ve invested everything in energy stocks for the past year, chances are your portfolio is taking a hit. I always do.

After a period of poor performance, I like to step back and analyze what went wrong, and think about how I can do things differently in the future. With that in mind, here are three investment lessons from 2022.

Value is always important

One of the biggest takeaways from 2022, in my view, is that price will always matter in the end.

In the years leading up to 2022, when interest rates are low and central banks are pumping billions into the financial system, valuations are a bit of an afterthought for many investors. Many (including me) own growth stocks at high valuations.

Currently, these stocks are generating strong returns in the years leading up to 2022. However, as soon as central banks start raising interest rates, valuations come into focus and start to underperform.

Tesla, which has a high value in 2022, is a good example here. It lost almost 70% of its value last year.

Now, I pay attention to the price. However, I’m still getting burned in 2022 for owning very expensive growth stocks.

So, going forward, I will focus more on stock valuations and look for companies that offer growth at a reasonable price.

No investment approach works forever

Another important lesson from 2022 is that no investment style works. In the years before 2022, there are several different styles that work well.

Growth Investment (Tesla, Amazonetc), quality investment (Apple, Microsoftetc), and thematic investments (renewable energy stocks, online shopping stocks, etc) are some examples of investment approaches that have produced strong returns for investors.

In 2022, the financial landscape changes dramatically. And suddenly, this approach to investing doesn’t work. However, a good value and dividend approach.

The takeaway here is that it can pay to have a variety of investment styles in your portfolio. By allocating capital to a variety of styles can reduce overall portfolio risk and generate returns.

It is important to position the right size

Finally, 2022 highlights the importance of ‘right-sizing’ stock positions in a portfolio. We often hear about the importance of diversification when building an investment portfolio. This is one of the most fundamental components of risk management.

But what is also important from a risk management perspective is to ensure that the position size in the portfolio is adjusted according to the level of risk. If the stock is too risky, it is wise to keep a very small position (less than 2% of the overall portfolio). Thus, if it tanks (like Tesla), the impact on the overall portfolio is small.

This is another portfolio management concept that I will focus more on in 2023. By sizing my stock position and keeping my exposure to risky stocks smaller, I can, hopefully, avoid big losses in the future.