How Investors Should Approach A Volatile 2023

Nobody knows where the Indexes will end next year. However investors need to effectively navigate through a series of known unknowns: How bad is the recession? When will rates plateau? And unknown unknowns: Geopolitics? War escalation? Another pandemic? And how does all this impact the economy and markets? Despite these uncertainties not all is lost. Investors should be prepared to use a few tools depending on how the year unfolds. Fan Yu, an expert in finance and economics writes in detail.

- Fan Yu

The market's fixation on inflation and the Fed's interest rate moves appears, at least for now, over.

We're moving onto real concerns such as an economic recession, and for investors, a corporate earnings and growth decline as a result of said recession. Nobody knows where the S&P 500 will end next year. In fact, few investors alive today have experience dealing with the confluence of factors impacting the current economy. We need to effectively navigate through a series of known unknowns - How bad is the recession? When will rates plateau? Will the Fed pivot to QE? And unknown unknowns - Geopolitics? War escalation? Another pandemic? And how does all this impact the economy and markets?

Despite this ominous introduction, not all is lost. Investors should be prepared to use a few tools depending on how the year unfolds.

Be Defensive

This is partially math. Let's say you have two portfolios, one a fairly defensive one and one an aggressively growth one, with $100 in each account to start. The defensive portfolio makes a modest 7 percent total return in twelve months (e.g. percent appreciation and 2 percent dividend yield), ending at $107. The aggressive portfolio loses 10 percent in the first six months. It would need to gain an additional 19 percent the rest of the way to achieve parity at the end of the year with the defensive portfolio (to end at $107). Put differently, in the long term it's usually better to pass up higher returns than to suffer losses.