As we near the end of the year, we look back at the past (almost) 12 months and share the key lessons investors could benefit from taking with them into 2024.

After a frustrating 2022, investors were fearful at the start of this year and hopeful for some respite. While things improved in some areas, challenges crept up in others, with a few surprises along the way.

Economies across the world have juggled with the impact of war and conflict, the cost-of-living crisis and rising interest rates as central banks try to tame inflation. The UK, for example, saw its most rapid series of interest-rate rises since the 1980s.

This came, however, after interest rates stood at unprecedented lows (in hundreds of years of central bank history) for some 15 years.

While rates may need to remain elevated for some time to bring inflation under control, this return to a more ‘normal’ environment for interest rates (where they are above the rate of inflation) is a positive development for investors. It should set a solid foundation for long-term returns from assets such as bonds¹ and shares.

Against this background, we offer some lessons that investors can take into the year ahead. While they are certainly not new practices, they are things to consider now more than ever. Investors should expect the unexpected and learn to focus on what they can control and to keep perspective.

It’s crucial to stay disciplined

We beat this drum a lot but it’s one of, if not the, most important lessons to stick to when it comes to investing.

Sometimes our emotions, whether a result of personal circumstances or wider economic and market news, can lead us to make simple mistakes and we can all too easily give in to impulsive behaviours.

For example, 2022 was the worst year in history for bonds and while 2023 has also been challenging, returns improved and our outlook is much more positive.

As you can see from the chart below, bonds had a tough couple of years but picked up this year. This shows the importance of staying the course.

Past performance is not a reliable indicator of future results.

Notes: The chart shows cumulative daily returns for each year starting 1 January 2021 until 22 November 2023 of the Bloomberg Global Aggregate Bond Index Sterling Hedged.

Source: Vanguard calculations in GBP based on data from Refinitiv, as at 23 November 2023.

Investors that stayed disciplined and kept their portfolios in line with their goals and appetite for risk are likely to be rewarded over the long term.

Diversification is key

So, we know that having a diversified and balanced portfolio of shares and bonds can help smooth out the ups and downs of markets. But this lesson doesn’t just apply to the type of investments you hold. This also means spreading your risk across different industry sectors and geographies.

The performance of US shares has surprised investors this year. At the start of 2023, many were pessimistic about the country’s prospects but today, the S&P 500² – an index made up of the 500 largest listed companies across different industries in the US – is up 15% since then, in GBP terms, and large technology stocks have driven gains.

This compares with the UK’s FTSE All-Share³, which is down 0.2% since the start of the year. This just shows a snapshot of what has happened in markets this year, but illustrates why it’s important to have a globally diversified portfolio, so that positive performance in some regions or sectors can offset those that perform less well. We believe investors should always take a long-term perspective.

Past performance is not a reliable indicator of future results.

Notes: LHS chart shows daily data from 1 January 2023 until 24 November 2023 of the S&P 500, MSCI World, Euro Stoxx 50 and FTSE All-Share indices in GBP.

Source: Vanguard, based on data from Bloomberg, as at 24 November 2023.

You can’t time the market

As we’ve already noted, US markets have been strong this year. But amid that, we had the US banking crisis in March which saw three banks fail over the course of five days, triggering a sharp drop in global bank stock prices. 

These large and unpredictable events show that timing markets is futile. No one can ever know when they will rise or fall and for how long they’ll remain rising or falling before turning the other way.

It’s also worth bearing in mind that the best trading days can often occur during a downturn and vice versa.  Looking back to the UK, as shown in the chart below, since 1980, 12 of the 20 best trading days have occurred in years with negative returns while 6 of the 20 worst trading days occurred in years with positive returns.

FTSE All Share daily returns

Past performance is not a reliable indicator of future results.

Notes: The chart shows daily returns of the FTSE All Share Price Index. The yellow bars highlight the 20 best trading days since 1 January 1980 and the tale bars highlight the 20 worst trading days since 1 January 1980.

Source: Vanguard calculations in GBP, based on data from Refinitiv, as at 3 October 2023.

It’s better to ignore the noise and focus on what you can control

Big events that have the potential to derail markets, whether geopolitical or financial, are a constant when it comes to investing. We've seen them happen this year and the likelihood is we'll see them again in 2024, with elections due in the US and UK.

At the end of the day, these events happen all the time, and we cannot control them. Instead, it’s better to focus on the things that you can control, such as your reasons for investing, what you invest in and how much you pay.

Having clear, appropriate investment goals can help you figure out how much – and for how long – you need to save, while spreading your investments across different assets, sectors and countries can help reduce the overall volatility of your portfolio.

There are also many ways to minimise costs to help improve returns. You can read more about our core investment principles and how they can help you to achieve investing success.

¹ Bonds are a type of loan to a government or company. What are bonds and why might you want to invest in them. June 2023  

² The S&P 500 is a stock market index that tracks the stock performance of 500 of the largest companies listed on stock exchanges in the United States.

³ The FTSE All Share is a capitalisation-weighted index, comprising around 600 companies traded on the London Stock Exchange.