“‘Twas the night before Christmas, when all through the house
Not a creature was stirring, not even a mouse.
The stockings were hung by the chimney with care,
In hopes that St. Nicholas soon would be there.”
It’s hard not to be warmed by Clement Moore’s 19th-century feelgood poem about the ‘holiday’ season. No matter your age, the promise of magic at Christmas is always alluring. Unfortunately, this has been a difficult, sobering, year for investors with hiding places few and far between – in many ways, 2022 has been an annus horribilis. The last week has been no exception, with markets lacking festive cheer despite the Federal Reserve (Fed) slowing its pace of US interest-rate increases. In part this reflects growing fears over recession, but it is also a reaction to comments from Fed Chair Jerome Powell that the inflation data does not yet provide sufficient evidence for easing. Following the Fed’s lead, interest rates were also increased by the Bank of England and the European Central Bank.
After a challenging year for markets, one often ponders whether it would be better to increase exposure to cash. Losses always tempt you to lose faith; but, whilst cash may be safe, it’s important to realise that inflation relentlessly diminishes its value. We all need an element of cash savings, be it a rainy-day fund or a safety net to cope with life’s unexpected expenses. Sometimes circumstances change and these might also necessitate holding more cash. However, if there has been no change in your personal outlook, keeping significant amounts in cash that might otherwise have been invested can be a recipe for disaster. Over the longer term, the overall purchasing power of money declines in real terms and the heightened levels of inflation we have seen over the last year only serve to accelerate this process. Put simply, the rates of interest currently on offer for cash deposits do not match the rate of inflation.
The aim of most investors is to grow their money or income on a long-term basis, i.e., at a rate that will both meet their goals and exceed long-term inflation. Although more volatile than cash, market-based investments – a balanced portfolio containing a range of different assets – have, historically, provided a better means of combating inflation. The reason for this is that the earnings and profits generated by the underlying companies tend to rise with inflation. This will not be the case with all companies, but higher quality ones, such as those with competitive advantage, tend to have pricing power. The end of the year is a natural opportunity to reflect and a chance to review how your investments are structured; for example, one area worth considering in 2022 is the role that bonds might play in your portfolio next year.
The final point to consider is whether you wish to turn a paper loss for the last year into a real one. It’s worth bearing in mind that if our investments lose value in a more difficult market, then we only experience that actual overall loss if the investments are sold. At some point the dark clouds of uncertainty will begin to lift and night will surely turn into day. By selling you miss out on the potential for recovery and your money simply does not have the ability to grow. A changing world is unsettling, but it also opens the door to the opportunities to create value. This is why it is important to be patient, stay the course and wait for ‘the prancing and pawing of each little hoof.’
We send our very best wishes to you and your families this Christmas.