Year ender 2022: What we learn from market and how can we invest in 2023?

Before you invest make sure you have your bases covered

Pay off any high cost (personal loans, credit card debt) – remember paying off a loan on which you are 15% interest will always make more sense than investing that money. No instrument can give you a guaranteed, risk-free 15% return.

We have all lived through the pandemic, so this should be obvious. Get term and health insurance policies. Again, don’t try to combine insurance with investment. Just plain vanilla policies that cover you and your family in a crisis are sufficient.

Don’t worry about macros

I have an unpopular opinion on this – but what the Fed does really doesn’t matter to most investors. The only time it matters is if one has the ability to make an informed contrarian call on Fed policies or most macro factors for that matter. And in my opinion, that is impossible to accomplish, unless you are close to Putin or Xi or Biden, and somehow have access to material non-public information. I know it sounds banal, but just stick to your asset allocation; everything else, as far as macros are concerned, is priced in.

Don’t try to time the markets

Daniel Kahneman’s quote captures one of the key mistake’s investors tend to make – “We are prone to overestimate how much we understand about the world and to underestimate the role of chance in events…We can be blind to the obvious, and we are also blind to our blindness.”

Just remember that for any given year, the entire year’s returns are made in 10 days on average (out of ~250 trading days). It is impossible to figure out what those 10 days are and therefore critical to stay invested through cycles. Overallocation to specific sectors or stocks based on perceived trends and ‘expert’ opinions, investing based on FOMO or recency bias, and inappropriate asset allocations are also some mistakes I think investors make frequently.

Have a robust system and stick to it

The best way to create wealth is sound asset allocation. Sound asset allocation means to be invested across uncorrelated asset classes. For example – Stocks and FDs are examples of assets that have near zero correlation i.e. when stocks move up or down, FD rates don’t move up or down in tandem. Hence, it is important that both these asset classes (“equity” – stocks and “debt” – FDs) be part of your portfolio. Similarly, there are other relatively uncorrelated asset classes like gold, international assets, real estate, and even crypto (subject to regularity clarity) that are also accessible to Indian retail investors. Remember, the investment journey in equities is not as smooth as a fixed deposit – you have to live with short-term pain in that asset class. Asset allocation is ultimately about managing volatility through diversification across assets, countries, commodities, and currencies to your advantage.

The rules of investing don’t change year-on-year. All of what I said above, was valid in 1973, is valid in 2023, and will probably be valid in 2073.

Author: Atanuu Agarrwal, Co-founder, Upside AI