🍔The Only Free Lunch in Finance hasn’t Worked this Year but Going into 2023, here’s why You Shouldn’t Give Up on it

2022 – what a time! After a perfect 2021 (almost too perfect), it was bound to be a year that would’ve been hard to beat anyway. Economies around the world were slowly opening their eyes after their covid slumber and govs were on a spending spree.

Money quickly found its way into every single asset class. Fun fact: 1 in every 5 dollars were printed during 2021. So no surprise that more money chasing a (still) finite amount of stuff means higher prices. For everyone. Yeah, sure people will want to blame supply chain problems (and they’re definitely to blame) but ignoring the money printing saga would mean missing the point. Or at least a large part of it!

Anyway, house prices started going through the roof and before you know it prices up in the US were up by an average of 18% in 2021 setting it into bubble territory. Crypto was on fire though now it’s gone up in flames (read here about FTX’s collapse and $8bn hole!) and stocks went on a vacay of their very own. Looks like they all partied a lil’ too hard. 2022’s hangover was nasty.

So, almost one year later and nearly every asset class is down this year. How down? Well that all depends on how frothy the sector/asset was to begin with.

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Though don’t get too grumpy just yet – China’s reopening could be 2023’s wild card. If China’s economy and its 1.4bn consumers(!) get out shopping and so on, this could seriously help. After all this country is nearly 20% of the worlds people. That’s gotta count for something! 

Beware and prepare for 2023

2023 is going to throw all sorts of challenges – hopefully some of the good sort too. But weaning our economies (and stock markets) off the drug called QE ain’t gonna be easy. There’s bound to be some nasty withdrawal symptoms and something tells me 2022 has already started reacting to it. Badly. (Psst: here are some things to watch out for as we head into recession & higher interest rates.)

Then there’s the interest rate situation. Govs are raising them too much too soon but they forget it takes around 18 months for the changes to actually filter through to the economy. So expect a storm next year. The full effect is yet to be felt.

Which is why, given the scale of uncertainty, you’ve gotta stick with diversification like I stick to chocolate. Something you can’t (or shouldn’t!) live without it. Yup, this year has been rotten for diversification. It’s been a year like no other. But here’s hoping that 2023 will mean our eggs spread across different baskets will pay off. And by that I mean we hopefully won’t lose too many eggs. Because something tells me 2023’s gonna be more about not losing than about winning. But I’m happy to be proved wrong!

What is this free lunch?

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Diversification is the only free lunch in finance because it’s the only thing you can do, where you’re basically going to increase your returns without having to take on more risk. Here’s a post I wrote on this – check it out here if you want to learn more. Sorry, it’s a bit old! But the point still stands.

Diversification really means you aren’t making a bunch of concentrated bets. The world is too risky and it’d be too chancy to know which countries/sectors will be the winning ones. Instead, it will pay to be prudent and sensible to make sure your portfolio’s got a whole load of different stuff in there. From American to Asia (yes, these powerhouses aren’t disappearing overnight!) to big guys and small ones, from income to growth, you’ve gotta have it all. 

Here’s how to not get caught in the rain 

Think of diversification as an umbrella of sorts! When it rains (and btw in London we get far less rain than everyone thinks) and you’re outdoors, you wanna be covered. Sure, a raincoat will do but an umbrella’s even better. That’s diversification for you. It should have your back. Yeah, this year it was a foul friend but I’m hoping it’ll pull through in 2023! 

Make sure that you keep on investing your money in loads of different places. Don’t bet on one thing. Bet on it all. No one knows what next year has in store, seriously. Not a clue. Sure the smartest folks will give their best guesses but markets often surprise us when we’re least expecting it. 

So don’t be all doom and gloom. But not all sunshine and roses either. 

Just remember, if it rains – you’ve got your umbrella. 

Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.