The Takeaway
Although classic stock/bond diversification simply has not worked in 2022 thanks to stubbornly high inflation and a string of steep interest-rate hikes, giving up on bonds seems premature.
Elevated valuations coming into 2022 explain the underperformance of growth stocks, sustainable investments and thematics. Trees don’t grow to the sky.
Private asset valuations have yet to fully reflect a slowdown, but signs point to a reckoning.
There’s no shortage of received wisdom in the world of investing. Rules of thumb explain what moves markets, how assets interact, and which investments best suit the macro environment.
Much of this wisdom is flawed. The forces that drive financial market behavior are unpredictable, and relationships between assets are fluid. Investment claims are often made by those who have something to sell. What can sound axiomatic often violates actual truisms, such as "past performance is no guarantee of future results," "the plural of anecdote is not data," and "the best company can be a bad investment at the wrong price."
Markets have been vexing in 2022. Generationally high inflation, a belated but aggressive monetary policy response, and the bloodiest European conflict since World War II have wreaked havoc on stocks, bonds, and other assets. For investors, the year has delivered many painful lessons.
Ultimately, one year is a short time frame in investing. For many, the best course of action is to tune out and hang on. Investment performance in 2022 may end up as a small blip on a long upward sloping chart. More important, perhaps, are the lessons that have been learned this year—about expecting the unexpected, preparing for the worst, and accepting how little certainty there is in investing.
Here we propose five learnings from 2022:
1) Diversification isn't always a free lunch (or bonds aren't always ballast).
2) Rising interest rates don't have a predictable impact on stocks.
3) Sustainable investments aren't immune to market cycles.
4) Growth themes don't always grow.
5) Private markets don't only go up.
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