By Henry Ford (with Morningstar)

Morningstar have looked back at 2023 and find the lessons reinforce established long-term principles.  We have summarised their article. The full article is available here.

1. Forecasting Challenges:

The year began with a wide range of predictions for the S&P 500, varying from a 5% decrease to a 24% increase. However, the market closed up by 26.4%, defying the average forecast of a 6% rise. This unpredictability highlights the challenge of making accurate market predictions and the importance of a cautious approach to market forecasts.

2. Re-evaluating Big Tech Performances, especially from the Magnificent Seven:

Whilst 2023 was a strong one for the S&P500, returns were dominated by the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla). However, when measured over 2 years, only three of the companies outperformed risk-free one-month Treasury bills over the same period. This underperformance, particularly by companies like Tesla, Alphabet, and Amazon, underscores the risk associated with high valuations and the necessity of realistic expectations from popular stocks.

3. Valuation and Timing:

The year started with U.S. equity valuations at high levels. Despite predictions of a market downturn, the S&P 500 showed strong performance, reminding investors that while valuations are key for long-term forecasts, they are not reliable indicators for short-term market movements.

4. Discipline in Investment:

History shows that all risk assets, including the S&P 500, go through periods of underperformance compared to risk-free investments. This calls for investor discipline to stay the course during challenging times, highlighting the importance of a long-term perspective in investment strategies.

5. Unpredictability Despite Information:

Even with complete knowledge of future events, predicting market reactions is difficult. The market’s performance in 2023, against various geopolitical and economic developments, demonstrates the complex nature of market movements and the challenges of market timing.

6. Non-Political Investment Decisions:

Investment decisions influenced by political views often lead to missed opportunities. The market’s strong performance in 2023, despite various political and geo-political apprehensions, is a reminder to keep political biases separate from investment strategies.

7. Short Periods Yielding Significant Returns:

A large portion of long-term returns can be attributed to brief, intense periods of market upswing. This emphasizes the importance of staying in the market, rather than trying to pick movements. Mostly they will happen while we are sleeping.

8. Avoiding Performance Chasing:

The trend of investing in previous year’s winners does not guarantee future success. Investment decisions should be based around a diversified portfolio, globally spread across asset classes rather than on past performance.

9. Active Management Challenges:

Most active fund managers struggled to outperform the market in 2023, highlighting the difficulty of active management in consistently beating market benchmarks.

10. Benefits and Challenges of Diversification:

While diversification is a key strategy for risk management, it can lead to periods of underperformance compared to popular market indices. This requires investor patience and adherence to long-term investment plans.

In conclusion, the financial markets of 2023 reiterate the importance of discipline when investing. They remind investors of the pitfalls of short-term thinking, the unpredictability of market forecasting, and the value of long-term planning and diversification. These lessons are crucial for investors aiming to navigate the complexities of the financial markets successfully.