Biggest mistakes investors made in 2022 (and how to avoid them)

Here is my top 5 investor missteps we saw in 2022, and how to avoid them in 2023.

Mistake #1: Trying to time the market

Many investors go to great lengths to try and pick the ‘right’ time to get into the market, and the best time to sell. We saw this in 2022 with extreme variations in share trading volumes at various points throughout the year.

The catch is that accurately picking when asset markets have hit a low or reached a peak is almost impossible, and chopping and changing out of investments trying to time the market can do little more than rack up expensive trading costs.

Fund manager Vanguard[1] analysed the investment behaviour of  Australians between 2004 and 2013, and found those who tried to time the market were at least 0.5% worse off each year compared to investors using a straightforward ‘buy-and-hold’ approach.

The bottom line is that it is easier, cheaper and considerably less stressful to focus on time in the market rather than trying to time it.

Mistake #2: Letting FOMO guide investment decisions

Hype can be a powerful force for investors, and never have the downsides of falling for hype and fear of missing out (FOMO) been more apparent than in the cryptocurrency market.

After more than 30 years in the money business I have seen plenty of financial fads come and go, but the race to make money on cryptocurrencies in recent years has been extraordinary.

Roy Morgan research shows that in mid-2022 over one million Australians owned digital currencies. Many would be in the red today following Bitcoin’s downturn from a peak value of over $80,000 in November 2021, to about $24,000 at the start of 2023.

As I noted through 2021 and 2022, there’s no doubt that blockchain, the ledger system behind cryptocurrencies, has many potential uses. But digital currencies themselves are incredibly speculative, and the market has near-zero regulation making it attractive to crooks and swindlers.

2022 highlighted just how dodgy many crypto operators can be with the collapse of crypto exchange FTX, and the arrest of its CEO Sam Bankman-Fried on allegations of fraud.

The savage downswing in crypto is a harsh reminder that following the herd and trying to make a quick buck in a new and unregulated industry can come with extreme risks.

Mistake #3: Failing to diversify

An ASIC study in 2022[2] found over one in two Australian investors concentrate their wealth in a small number of assets. Over one-third of investors hold only one type of investment (e.g. Australian shares). One in four own just two different investments. Even among sharemarket investors, the median number of stocks held is just three.

If you’re looking for a goal for 2022, it’s not a bad idea to make it diversification – spreading your portfolio across a variety of asset classes, and even various assets within those classes. It’s a step that can be achieved at low cost, and with limited capital, through exchange traded funds.

Vanguard’s annual Index Chart is a great reminder that successful investing depends not on picking winning stocks, but rather on broad diversification.

Over the last 30 years, every major asset class has had a turn at being the best performer, as well as the worst. And there’s almost no way of knowing for sure which asset class will be next year’s rooster – or feather duster.

As a guide, in the 2022 financial year, the best performing asset class was cash with a return of 0.1%. Australian equities recorded a loss of 7.4%. But the year before, Aussie shares recorded gains of 30.2%, while international shares notched up returns of 27.5%.

As the table below shows, investors who maintain a well-diversified portfolio will be rewarded in the long run.

Mistake #4: Assuming ‘active’ investing outperforms a ‘passive’ strategy

The debate regarding active versus passive (or index) investing has been raging for years. Fans of active investing believe they can pick the next big thing. Those in favour of indexing, which is a strategy used by many exchange traded funds, point out how hard it is to consistently pick sharemarket winners.

A good reference point to clarify the debate is the SPIVA Australia Scorecard. It measures the performance of actively managed funds against their respective benchmarks over various timeframes.

The SPIVA Scorecard[4] for the first six months of 2022 shows that one in two actively managed Aussie share funds failed to beat the market over the 6-month period.

The longer the timeframe, the less likely an active approach will outperform the overall market. Over a 5-year period, 74% of active funds failed to beat the market, a figure that rises to 77% over the last ten years.

The key takeout is that it is hard to better the market in any given year. To do it year after year is almost impossible. Yet actively managed funds typically charge higher fees than passively managed exchange traded funds – and investors pay those fees no matter whether the fund beats the market, or gets beaten by it.

Mistake #5: Falling for the get rich quick spin

In the first nine months of 2022, Australians lost $292.9 million to investment scams, making this the most financially damaging scam we face^[5]. These losses  are likely the tip of the iceberg as only about 13% of victims report being fleeced.

Don’t let 2023 be the year you fall for a scam. If you’re approached with an offer out of the blue the warning bells should start ringing, especially if you are promised high or fast returns with little or no risk.

Don’t be taken in by celebrity endorsements (they could be fake), and do plenty of your own research. Check if a company has an Australian financial licence at ASIC Connect's professional registers. Or see if the company is on ASIC’s list of companies you should not deal with.

Above all, let common sense be your guide. If something sounds too good to be true, it probably is. The table of 30-year returns I looked at earlier shows the average returns of mainstream asset classes over the very long term. Any returns above these results is going to come with a lot more risk, including the very real possibility that you’re dealing with crooks.