2023 in review: 5 essential investing lessons

8 minute read

Markets can be unpredictable, and 2023 was certainly no exception. The year was marked by a series of surprises and challenges including a banking crisis, wars in Ukraine and the Middle East, and rising costs of living.

But in a year where everything felt bad, most major markets closed off at or near record highs. How and why did that happen? Find out in this article where we recap key market events and unpack the top 5 investing lessons from 2023 to help you make well-informed investment decisions in 2024 and beyond.

Lesson 1: The market is not the economy

Economists’ warnings of an impending recession have long stirred concerns among investors, leading to a sort of ‘recession obsession’ fueled by attention-grabbing headlines. Instead, many investors were left scratching their heads as markets soared while companies faced rising costs for doing business, job cuts mounted, and economic data presented a rollercoaster of negative and positive indicators. Despite the gloomy economic outlook and recession fears throughout the year, most major indices defied expectations and reached new highs in 2023 (Figure 1).

Figure 1: 2023 market performance

Index Return
Bonds (FTSE Canada Universe Bond) 6.7%
Canadian Equities (S&P/TSX Composite) 11.8%
U.S. Equities (S&P 500, US$) 26.3%
Global Equities (MSCI World, US$) 24.4%
Emerging Markets (MSCI Emerging Markets, US$) 10.1%

Source: Bloomberg. Total Return, as at December 31, 2023. Indices are quoted in their local currency. Indices are not managed, and it is not possible to invest directly in an index.

What we learned: As tempting as it is to react to the prevailing economic sentiment, it is often unprofitable to do so. 

Just like weather forecasts, market and economic predictions can be wrong. While short-term fluctuations are common, markets generally trend upwards over the long-term. And investors who parked their investments in cash at the start of the year due to recession fears would've missed out on significant growth in 2023 (Figure 2).

Figure 2: The cost of waiting on the sidelines

A line chart showing the difference in growth of $10,000 invested in a cash portfolio compared to a hypothetical balanced portfolio in 2023. An investor who was worried about a recession and kept their investment in cash would have ended the year with $10,483 (4.8% return). A disciplined investor who stayed invested would’ve experienced greater volatility in their portfolio value but would have ultimately ended the year with $11,301 (13.0% return).

Source: Morningstar Direct, as of December 31, 2023. This chart shows the inferred growth of $10,000 invested from December 31, 2022 to December 31, 2023. For illustrative purposes only. The hypothetical balanced portfolio is composed of 30% S&P/TSX Composite TR Index (Canadian Equities), 30% S&P 500 TR Index (U.S. Equities) and 40% FTSE Canada Universe Bond Index (Canadian Bonds). The cash portfolio is represented by 100% S&P Canada Treasury Bill TR (Canadian T-Bills). Returns are calculated in Canadian currency. Indices are not managed, and it is not possible to invest directly in an index. Assumes reinvestment of all income and no transaction costs, fees, or taxes.

Lesson 2: There are always excuses not to invest

Though markets ended the year with strong performance, it was a bumpy ride along the way. Last year, like every year, presented many “reasons for not investing,” as concerning headlines, especially those about geopolitical conflicts, dominated the news (Figure 3). 

Figure 3: Ignoring reasons for not investing in 2023 (Growth of $10,000 over the last year)

A line chart showing the growth of $10,000 in Canadian Equities, U.S. Equities, and International Equities in 2023. It features speech bubbles with various ‘reasons for not investing’ such as wars in Ukraine and the Middle East, the threat of a U.S. debt ceiling default, failure of several banks, hot inflation and rising interest rates. Despite these reasons to not invest throughout the year, major market indices rose in 2023, defying expectations.

Source: Morningstar Direct, as of December 31, 2023. This chart shows the inferred growth of $10,000 invested from December 31, 2022 to December 31, 2023. For illustrative purposes only. Indices are not managed, and it is not possible to invest directly in an index. Assumes reinvestment of all income and no transaction costs, fees, or taxes. Percentage market gain/loss based on return from the S&P/TSX Composite TR Index (Canadian Equities), S&P 500 TR Index (U.S. Equities), and MSCI EAFE NR index (International Equities). Returns are calculated in Canadian currency. Compound growth calculations are used only for the purposes of illustrating the effects of compound growth and are not intended to reflect future values of any mutual fund or returns on investment in any mutual fund.

What we learned: Markets are resilient despite uncertainty. While there may be reasons for hesitation, history shows that markets typically rise over time, rewarding those who remain patient and stay invested. 

Scotia Portfolio Solutions have a long history of successfully navigating changing and challenging market dynamics. Scotia Global Asset Management’s Multi-Asset Management team, manager of Scotia Portfolio Solutions, continually seek new ways to enhance diversification, manage volatility and improve the risk-adjusted returns of the portfolios – ensuring investors can remain focused on their long-term goals with confidence.

Lesson 3: Inflation can take a bite out of savings

Canada experienced multi-decade high inflation post-COVID-19, with the consumer price index (CPI) peaking at 8.1% in June 2022. It dropped to 3.1% by late 2023 but stayed above the Bank of Canada’s 2.0% inflation target (Figure 4). In response, central banks aggressively raised interest rates throughout 2023, raising borrowing costs as consumers felt the impact of inflation at the cash register with higher costs for goods and services.

Figure 4: The impact of surging inflation

Inflation (CPI, year-over-year)
10-year annual average (2013-2022) 2.2%
2023 annual average 4.2%
Impact on Canadians 3 in 4 agree that the rising cost of living has negatively impacted their ability to save/invest.

Sources: Statistics Canada, Scotiabank Investment Poll, August 2023.

What we learned: With the cost of nearly everything rising, saving has become increasingly difficult for many Canadians. Paying regular bills and enjoying life matters, but so does your financial security in the future. If saving is one of your goals in 2024, consider automatic savings through pre-authorized contributions (PACs) right after each payday. This ‘pay yourself first’ method can help you continuously make progress towards your financial goals. 

Did you know?

 

Despite high inflation, 1 in 2 (49%) of Canadians say saving for their long-term future continues to be their leading financial priority.

Source: Scotia Global Asset Management Investory Sentiment Survey, November 2023. 

Lesson 4: Don't abandon bonds

After a tough year in 2022, bonds continued to decline in early 2023 as interest rates climbed, tempting many investors to ditch bond allocations from their long-term financial strategy. But the tides turned quickly as cooling inflation positioned central banks to soften their tone about future rate hikes, boosting Canadian bonds to end the year with a 6.7% gain.

What we learned: Bonds can face short-term volatility (see Figure 5) but have historically recovered quickly, and they continue to play an important role in diversified portfolios.

Bonds help reduce risk, as they have low correlation with stocks, providing stability and regular income over the long term. And as interest rates fall, bonds stand to benefit, as falling interest rates boost bond prices.  

Figure 5: Bonds tend to rebound quickly and strongly after periods of negative returns

A bar graph with rolling 1-year rolling returns for the FTSE Canada Universe Bond Index over the last 40 years. It shows that periods of low or negative returns have historically been short lived, and that bond returns tend to rebound quickly and strongly afterwards.

Source: Morningstar Direct, data as of December 31, 2023. For illustrative purposes only, it does not constitute investment advice and must not be relied on as such. Indices are not managed, and it is not possible to invest directly in an index. Bonds are represented by the FTSE Canada Universe Bond Index. Returns are calculated in Canadian dollars.

Lesson 5: Winners rotate, diversification is key

Artificial intelligence (AI) made huge advances in 2023 boosting some technology stocks ('the Magnificent 7') by more than 75%. This stands in sharp contrast to just one year prior when the Information Technology sector dropped 23.0% in 2022. This drastic market shift shows just how unpredictable market leadership can be (Figure 6).

Figure 6: Today’s winners can quickly become tomorrow’s losers

A bar chart depicting how calendar year returns for various sectors and asset classes can vary significantly from one year to the next. By comparing calendar year returns for 2022 and 2023 for the Information Technology and Energy Sectors within the S&P 500 Index, the S&P 500 Index, Canadian Bonds, and a Balanced Portfolio, it suggests that best and worst performers can change from one year to the next. For example, the S&P 500’s Information Technology sector underperformed significantly in 2022, returning -23.0%, in stark contrast from the sector’s 53.6% return in 2023. Investing in a balanced portfolio can help investors take advantage of top performers while minimizing the impacts of those at the bottom.

Source: Morningstar and Bloomberg, data as of December 31, 2023. For illustrative purposes only. Indices are not managed, and it is not possible to invest directly in an index. Information Technology and Energy Sectors are represented by sector return in the S&P 500 Composite Index, Canadian Bonds are represented by the FTSE Canada Universe Bond Index, Balanced Portfolio is comprised of 30% S&P/TSX Composite Index TR (Canadian Equities), 30% S&P 500 Index TR (U.S. Equities) and 40% FTSE Canada Universe Bond Index (Canadian Bonds). Returns are calculated in Canadian dollars

What we learned: Diversification and asset allocation are key to long-term investment success.

There really is no way to know with certainty when specific sectors, styles, or asset classes will outperform and for how long. No single asset class is consistently among the top performers, and the best and worst performers can change from one year to the next. A diversified portfolio of different asset classes provides the opportunity to participate in potential gains of each year’s top asset classes, while aiming to lessen the impact of those at the bottom. Scotia Portfolio Solutions are diversified across asset classes, sectors, and geographies, to name a few, and actively managed to capitalize on investment opportunities across a variety of different market conditions. 

Did you know?

 

Concentration risk (the risk of being overexposed to a single asset class, sector or region) for index-investors is at an all time high. At the end of 2023, the top three sectors in U.S.'s S&P 500 index make up over 50% of its composition, and the Financials sector dominates in Canada at almost one third of the S&P/TSX Composite index.

The bottom line

The past year has been a testament to the timeless principles of investing. It was a year riddled with unexpected turns, reinforcing the value of strategy over speculation and perseverance over pessimism. As we reflect on 2023, investors can benefit from the following timeless investing principles to help in times of uncertainty:

  • Invest early. Embrace the power of compounding. The earlier you start, the longer your investments have to grow, despite what economic predictions or news headlines may say.
  • Invest often. Establish and maintain a disciplined approach to investing. Regular contributions are key to building resilience in your financial journey.
  • Stay Invested. There are always excuses not to invest. Tuning out the noise, focusing on the long-term, and remaining invested during short term market dips can help keep you on track to reaching your long-term investing goals.
  • Diversify. Mitigate risks and capture opportunities with a diversified portfolio.  Scotia Portfolio Solutions make investing easy by diversifying across a variety of investments spanning different management styles, asset classes, geographies, industries and company sizes in one convenient solution.

Remember, while you can't predict every market turn, you can prepare for the journey with a financial plan and the help of your Scotiabank advisor.

Check off "Review financial plan" from your to-do list!

 

Meet with your Scotiabank advisor to review your investments and financial plan for 2024.