Important investing lessons from 2022

With the worst of the pandemic behind us, we all started 2022 with hopes of bluer skies and back to our beloved “normal” days. Little did we know that the black swan sightings will become the new “normal”. First, crazy high inflation, then war, Fed rug-pulling the stock markets, energy crisis, and then cryptos crashing down, 2022 has been anything but normal. A wave of bad news kept bombarding us throughout the year.

And unfortunately, we will be carrying pretty much all the concerns of global economic uncertainty, war, supply chain issues, inflation, and higher interest rates into the new year as well. 

This year has been tough for a large number of retail investors, many of whom only started their trading journey at the height of last year’s bull market run.

As we step into the new year, it’s a good time to reflect back and learn some investing lessons that are hard to learn without actually experiencing them firsthand.

Here are seven investing lessons from 2022 that I learned this year that will, hopefully, help you as well.

Lesson 1: What goes up must come down, and rise again.

Equity markets are inherently volatile and may or may not give high returns every year. Nifty 50 was up just 3.2% and if adjusted for inflation, real returns from equity were negative in 2022. In case you had a 1-year goal, very likely you would have not been able to meet it had you invested entirely in equities.

So, one should invest in equities only if you have a longer time horizon and have the risk appetite to withstand the volatility. But do not put 100% of your money in equities, ever.

Lesson 2: Keep investments simple

Do not complicate your investments and invest only in things you understand. Do not give into “hype” and stick to the basics. About 115 million Indians invested in cryptos so far. These are highly risky and unregulated investments and one should only invest keeping the risk-reward ratio in mind. Bitcoin is down about 65% and other tokens and coins are down much more.

Take out time and understand your investments and be wary of internet hype or stocks that skyrocket overnight.

Lesson 3: Keep emotions aside

Ups and downs in an equity market are inevitable. However, panic selling when markets crash is one of the worst things you can do as a retail investor.

You can never accurately predict the stock market’s short-term movements. You should therefore remain calm and focus on your long-term investment strategy during a market crash. Keep your SIPs running and buy more on days when markets are massively down. That’s the easiest and time-tested method to keep emotions away from your investments.

Remember what Warren Buffett once said: “If you are not willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

Lesson 4: Know whom to trust

For decades, retail investors have been a victim of rampant mis-selling of financial products and SEBI has been rightly brutal about such false narratives. Money is serious business and provision of financial advice should not be open to any Tom, Dick, and Harry on the back of social media popularity. Be very careful of whom you rely on for sound financial advice. Do not “blindly” follow social media tips and always apply your own discretion.

Lesson 5: Do not lose sight of fundamentals

Investors had put in a lot of money in several hyped IPOs of 2021 which are 35-60% down from their IPO price in 2022. This reminds me of a quote from a popular author Robert Greene – “Learn to use the knowledge of the past and you will look like a genius even if you are really just a clever borrower”.

If you looked at the past performance of these IPOs, most of them did not have a single profit-making year. Yet they were valued at 30-40 times their sales. While I agree that for some stocks past records may not work in the future, they are more of an exception than the rule.

Lesson 6: Do not ignore debt

Investors often ignore debt instruments such as bonds, and debt mutual funds when there is a boom mentality in the equity markets. During (and post) Covid-19 a large number of first-time Indian retail investors migrated from investing in FDs into equities. 

While this led to the financialization of savings, investors today, especially millennials are wary of investing in fixed-income instruments due to their low returns compared to equities.

Staying ahead of inflation doesn’t always mean buying only the equity-oriented instruments. The optimal way to go forward is to have the right asset allocation model as per the risk appetite and goals of an investor.

Finally lesson 7: Create a backup

Economic downturns and layoffs move hand in hand. 18,000+ employees were fired by startups this year. Thus, creating an emergency fund or a buffer is all the more important to ensure that you do not fall into a debt trap when financial surprises come your way.

Above all, the biggest mistake that you would have made in 2022 is if you didn’t invest at all. With investments comes discipline and these little steps help you get closer to the future and lifestyle you envision.

Happy investing and making new mistakes in the new year! Cheers!