What can investors learn from 2022?

A look back at some of the year’s key investment themes with Vanguard’s James Norton.

By James Norton, head of financial planners, Vanguard, Europe.

No one can predict how markets will behave, not with any certainty. There are just too many possible variables.

It’s why investors need to expect the unexpected by spreading their risks, focusing on what they can control and keeping perspective.

It also helps to remember why you’re investing in the first place.

That’s the essence of Vanguard’s four investment principles and 2022 was no different in demonstrating their enduring utility.

Here are four key observations from the last 12 months that underline why it’s important to be methodical when investing.

Inflation is real

For years, we took low inflation for granted.

But then came the supply bottlenecks and the demand surge that followed the pandemic, plus the energy and food price shock sparked by the Ukraine war. With tax rises and higher interest rates adding to the squeeze on people’s incomes, these are challenging times for many people.

The Office for Budget Responsibility projects that real household disposable income per person is set to fall by 4.3% in 2022-23 and by another 2.8% next tax year.

That means someone with a take-home pay of £30,000 at the start of the current tax year would see the value of that fall to £28,710 by next April and to less than £28,000 by April 2024.

This income squeeze should get you thinking about your cash buffer – your rainy-day fund. Is it still fit for purpose? How much of your outgoings would it cover and for how long?

Higher inflation is also a reminder of why we invest in the first place: to protect the real value of our money and hopefully grow our wealth by generating inflation-beating returns over time. Shares, after all, have a strong historical track record of doing just this, as shown in the table below, which contrasts their performance with that of bonds and cash¹.

Trade-off between market risk and inflation risk: total returns 1901-2020

	Nominal			Real (inflation-adjusted)
	Average annual return	% of years with negative return	Greatest annual loss²	Average annual return	% of years with negative return	Greatest annual loss²
Cash¹	4.62%	0%	-	1.01%	35%	-10.32%
UK bonds	5.60%	28%	-9.71%	1.96%	43%	-18.84%
UK shares	9.17%	28%	-18.70%	5.41%	33%	-21.43%

Past performance is not a reliable indicator of future results. Notes: Data cover 31 December 1900 to 31 December 2020. Returns are in GBP. Nominal value is the return before adjustment for inflation with dividends and income reinvested; real value includes the effect of inflation.

Sources: Vanguard, using Dimson-Marsh-Staunton global returns data from Morningstar, Inc. (the DMS UK Equity Index, DMS UK Bond Index, DMS World Bill Index).

Similarly, if you’re going to depend on your investments for your upkeep when you retire, are you still on target to live at the same standard of living as you were hoping for? Is there anything you can do now to counter that, such as raising your pension contributions?

What’s hot today may not be hot tomorrow

Chasing performance may be tempting when deciding what to invest in. But the past is not a reliable guide to the future. Pick your investments based simply on what did well last year and you could end up with too many eggs in the wrong basket.

It’s natural for human beings to behave this way. Psychologists call it ‘recency bias’. But as investors we need to guard against it by having an appropriately diversified and balanced global portfolio that spreads our exposure across countries, industries and investment types.

This year, for example, we have seen how technology shares have fallen sharply after being the darling of the markets for several years. The energy sector, meanwhile, has extended its 2021 gains after a poor performance in 2020.

Similarly with emerging markets, which have had another weak year having done better in 2020.

Can you really be certain that these trends will continue?

Bonds: keep perspective

Government bonds are on course for their worst year in decades. As at 30 November 2022, the Bloomberg Global Aggregate Total Return Index – a global benchmark tracked by funds – was down 11% year-to-date in sterling terms³.

Bonds have fallen at a time when shares globally have also been weak and by more than shares, raising questions about their role as a stabilising portfolio counterweight to shares.

History shows that it’s not that unusual for shares and bonds to fall at the same time. This has happened around 13% of the time since 1995⁴. What matters is that over time they diverge again, enabling shares to drive a well-balanced portfolio’s returns and ensuring bonds continue to provide diversification benefits.

This is where it helps to zoom out and look at the bigger picture, because shares at their very worst have still fallen a lot further than bonds while doing significantly better over the long term. The chart below, covering the previous 20 years shows just how much of an outlier 2022 has been.

The performance of different investments

Past performance is not reliable indicator of future results.

Sources: Bloomberg as at 31 December 2021. Indices used: Bloomberg Global Aggregate Total Return, hedged in pounds sterling. Shares: FTSE all-World Total Return, in pounds in sterling.

Notes: The performance of an index is not the exact representation of any particular investment. As you cannot invest directly into an index, the performance shown in this table does not include the costs of investing in the relevant index. Basis or performance NAV to NAV with gross income reinvested.

Investing isn’t speculating

The crypto market slump we’ve seen this year shows why get-rich-quick schemes are rarely as good as they sound. Better a get-rich-slow approach that doesn’t overpromise, recognises that markets are unpredictable and that economic conditions can change.

Investing involves some risk but it still isn’t the same thing as speculating, which is what buying cryptocurrencies to my mind is. It’s not something where you should be prepared to lose all your money – not if you do it right by always following Vanguard’s four investment principles.

Instead of racing ‘to the moon’ better to be focused on getting to your goal and considering an appropriately balanced and low-cost global portfolio.

¹ UK Treasury bills are used here as a proxy for cash.

² Greatest annual loss is represented by the lowest 5th percentile of annual returns.

³ On a hedged basis.

⁴ Source: Vanguard. Notes: Data reflect rolling period total returns for the periods shown and are based on underlying monthly total returns, with dividends and income re-invested, for the period January 1995 to May 2022. Global shares are represented by the FTSE All-World Index and global bonds are represented by the hedged Bloomberg Global Aggregate Index. Returns are in GBP.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Important information

This article is designed for use by, and is directed only at, persons resident in the UK.

If you are not sure of the suitability or appropriateness of any investment, product or service you should consult an authorised financial adviser. Please note this may incur a charge.

The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.