For years, tech stocks were all the rage. The Nasdaq 100 post double digit returns for eight of the ten years up to the end of 2021. The other two years posted returns of 4.58% and 9.91% (you could round this up to double digits!). With returns over 30% for last three of those years, it would not be difficult to get distracted by the returns and go all in on tech.
The 2022 hit! An absolute disaster for tech stocks. There was massive falls in well established companies with Meta falling -64%, PayPal down 62% and the biggest growth stock of all, Tesla, falling -65%. Some of the biggest companies in the S&P 500 are tech stocks and they make up 26% of the entire index.
The companies in the top ten with negative returns make up 20% of the entire index. There are some positives though, with Exxon Mobil posting returns of 80% last year. In fact, in 2022, nine of the top ten performers in the S&P 500 were Energy stocks. Solar panel manufacturer First Solar (energy too, just not fossil fuels) was the other one. Other winners were Healthcare and Insurance, which is Berkshire Hathaway’s main source of income. Would you have picked them? Unlikely. Picking individual stocks in incredibly difficult to do and it takes more than guess work to get it right on a consistent basis.
When we combine those poorly performing stocks with those with positive returns this year, we see that the S&P 500 fell by -13% for the year. Which isn’t bad considering the two largest companies in the world (12% of the total index) fell by almost a third last year. This is the impact of diversification.
As we look forward to 2023, many commentators are predicting a recession. How severe it will be and how long it will last is still up for debate. Will any industry post positive returns in 2023? Will it be Energy again? It did very well last year but can it carry that into this year? Energy is a highly volatile industry with lots of examples of burst of high returns before slumping the following year. I certainly wouldn’t feel confident in putting my money in any one industry over the next year.
That is why having a diversified portfolio investing across all the industries is the best course of action. You won’t get the highest highs but then, you won’t get the lowest lows either. It is real diversification in action.
09 January 2023