Editor’s note: This article was first published in March 2022 during that year’s market sell-off. The remarks that we were coming off a 10-year bull market, that crypto was falling with stocks, and the advice to stay out of the market for about a year all refer to that moment.
The internet is full of websites and people offering hundreds of tips on how to invest your money in an unstable market like this year’s, 2022. Most of them start from a basic mistake: they think they know what prices are going to do. We’d like to remind you that nobody has the slightest idea what the stock market, the crypto market or any particular company will do over the next few months. We’re investors, not fortune tellers. That’s why you should invest with common sense and leave the forecasts to the shamans.
If the market is unpredictable as a rule, right now it’s far more so. So we’re going to look at some of the most popular recommendations doing the rounds online and give our point of view, working our way to what we consider the most sensible advice for a moment like this.
How or where to invest in 2022
See also: What can you invest your money in? 14 options
Should you invest in mutual funds?
We won’t name names, but there are investment funds that have performed excellently over the past decade, so they get plenty of recommendations from some advisers and finance experts.
Well, there’s something we need to understand (whoever it may upset):
1. Most of the actively managed funds being recommended haven’t actually outperformed the S&P 500
Have they delivered good returns? Of course. Have they beaten their benchmark index? Most haven’t. Once again, active management rarely outperforms index investing or passive investing.
2. We’re coming off a 10-year bull market
This means that even a monkey picking stocks at random would have made a good return. There’s no merit and no mastery in a bull market. The problem is that many investors are seduced by the high returns certain funds achieved during a bull run without realising that those past returns may well go wrong in the markets’ new situation.
3. People forget about regression to the mean
In investing, regression to the mean tells us that pure chance makes a fund manager stand out from other funds for a period of time, which might be one year or three.
Regression to the mean itself means that in the next period that same fund gets the worst results, while the one that did worst manages to beat the previous top performers in the next period. Basically, we’re suggesting that every manager has lucky streaks, just as every last digit in the lottery has its moments. Hard to hear, but no less true for that.
With this in mind, and bearing in mind when investing your money that nobody knows what markets will do in the short term, we need to turn to an investment strategy that already takes these factors into account. So in the next point we again set out the alternative to mutual funds and ETFs.
If you’re not clear on these concepts, in this article we look in detail at the difference between index funds and ETFs.
Be clear about your time horizon
Once we’re clear that nobody can know what companies, share prices or markets will do in the short term, at least we know one thing: indices rise over the long term.
Let me take this opportunity to explain to people with less knowledge of the stock market why an index tends to rise even though many of the companies in it don’t get the results they hoped for.
An index such as the S&P 500 or the IBEX 35 (Spain’s benchmark index) tends to include the cream of the crop. This means that if several companies start losing ground because their business model is outdated, they stop being among the best and end up being removed from the index, replaced by other companies with greater potential for growth. This is one of the reasons why indices tend to rise over the long term.
That said, the most profitable investment horizon, and the one every investor should look at, is the long term of at least 10 years, because that period has shown that, whatever point of the market cycle you start from, an investor has had a positive return over that time, with a few exceptions. Obviously, investing late in a bear market is far more profitable than investing at the very peak of a bull market.
See also: Stock market investing: the only 3 risks an investor faces
Index investing
Given everything above, if we have to choose between an actively managed fund and an index fund, the smartest choice will always be the index fund, because index funds have been shown to deliver better long-term returns than most actively managed funds.
An index fund replicates the performance of its benchmark index. Basically, it means buying the index with all the companies in it rather than buying individual stocks.
At first, many investors may think that by investing in an index fund they’re missing out on great investment opportunities, because an index fund might give us an average annual return of eight or twelve percent. But the fact is that a mutual fund rarely beats that return over a 10-year period.
This is something you need to know and understand so you don’t fall for the pitches of snake-oil sellers and stock market charlatans. In fact, we’ve explained before why we believe technical analysis doesn’t work. And I have to say that, despite all the studies that have already shown that technical analysis traders don’t beat an index fund, they remain convinced that investing and trading with technical analysis gives them extra returns.
Well, ladies and gentlemen, I’d love to lie to you, but the statistics say otherwise, however much it may upset some people. Another day, if you like, we can play at lying to keep some people happy.
Can technical analysis give us an edge to capture extra returns within a specific trend? Of course, but the moment you try to ride too many trends, you’re playing the stock market game, and that game almost always ends the same way: you lose. And you lose for one reason only: “active management doesn’t beat passive management, full stop.”
Should you invest in Bitcoin and cryptocurrencies?
Before the problems we’re now going through in the markets arrived, when we talked about the possible crisis that would hit in 2022, we said something about Bitcoin. I suggested, in so many words, that Bitcoin and cryptocurrencies are not outside the system, as some believe, but part of it. We said explicitly that if stock markets fell, cryptocurrencies would fall with them. I insist: because cryptos are part of the system. Can anyone doubt that right now? Things look clearer in hindsight.
Cryptos have more than proved what many people already knew. They are not a currency, a store of value or a safe-haven asset. In fact, at the very moment they could have shown they work as a safe haven or a store of value, they ended up following the stock markets, while gold has kept doing better than Bitcoin.
A visible event that has already happened is worth more than anything we can say here.
So, is investing in Bitcoin or cryptocurrencies a good way to make money in 2022? Certainly not, and that doesn’t mean crypto prices can’t take off again.
Bitcoin could have proved its worth as a safe haven or a store of value, but it has disappointed (again).
See also: 14 things you should know before investing in the stock market
But then…
How do I invest in 2022? Where can I invest? What would be the smartest move?
Of these questions, the how, the where and the smartest, we’re going to focus on the third: the smartest.
Bearing in mind, as we often say, that we’re investors and not gamblers, the smartest thing in my opinion (unless you’re someone who can predict the future) is to stay in cash and focus on generating large amounts of cash for when this storm passes.
But what about inflation…
Believe me, if you have to go a year without investing, inflation will do less damage to your money than several failed or loss-making trades. You’ll also sleep better at night, and sooner than you think you’ll have the chance to catch the wave of a bull market again.
When the time comes, you’ll be ready to build your own diversified portfolio of individual companies, start a dollar-cost averaging (DCA) strategy, or simply index your investments.
Remember: even if you’re a pretty good swimmer, it’s best not to go into the water when you see the red flag flying on the beach.
If you haven’t read it yet, the following article looks at luck and randomness in the stock market, drawing on several true stories.
Featured image: דוד שי, CC BY-SA 4.0, via Wikimedia Commons.
