Vitamin founder and CEO Andrea Fernandez looks back on the year 2022 and explains which developments have influenced our finances. As an experienced financial expert, she also takes a look into the future as an experienced financial expert and explains how you can prepare for upcoming changes and successfully take control of your finances in 2023.
More interests, higher inflation – a look back at 2022
Last year when we were writing our outlook for 2022, the world looked quite different than today. We had seen the first signs of increasing inflation but interest rates were almost at zero or we were afraid to be paying for holding cash in the bank. We were still in an environment of growth, which had also been reflected in high returns in the equity markets.
Today, the world looks quite different. The key dynamics that impacted the financial markets in 2022 were:
- The sudden start of the war in Ukraine and all of its human and financial impact.
- High oil and energy prices on the back of the war in Ukraine. These costs meant more input costs for many different kinds of products. They also mean that we as consumers are facing higher energy prices for heating, gas, and fuel.
- Inflation rates that reached levels not seen since many years ago. In Germany, inflation peaked in October with an inflation rate of 10,4%. In November, euro area inflation reached 10,1%. In Germany, long-term inflation (1960-2021) had been 2,6% per year. The trend of inflation has been going higher and higher, driven both by the supply chain impacts of COVID and high oil prices.
- Increasing interest rates: as the Fed in the US, the ECB, and the Central Bank of England, among other central banks, saw inflation rates continue to increase they decided to increase the key target rates (the fed fund rates in the US for example). These rates directly impact the flow of money in the economy (for example, the higher the interest rates are, the less we are motivated to spend and the more we are likely to save). The goal of central banks is that it should help to cool off inflation.
- Slowing growth due to the various dynamics playing out from higher interest rates to shrinking consumer spending. This has resulted in the impending risk of recessions and slower growth across the globe.
- Crypto crisis: many of the cryptocurrencies have basically crashed and many people have lost money due to this. We have seen the demise of FTX, Celsius Network, BlockFi among several others. This has brought a lot of uncertainty to the future of crypto as we have known it so far.
- The equity markets have suffered a bad year. The S&P500 has returned -19,3% at the time of this publication, the Dow Jones Industrial Average has returned – 8,9% YTD, and technology and growth stocks have been significantly hurt this year. The Nasdaq Composite is at a -32,4% year to date. The European markets have also taken a hit. The STOXX Europe 600 is at –12% YTD and the DAX has returned -12% this year.
Between economic slump and inflation rates – what we can expect in 2023
So let’s now take a look into the much-cited “big crystal ball”. The only thing that is currently certain is that uncertainty will remain in 2023. But we are also left with the hope that we can make it work, just as we have done for generations. But first, we have to prepare for further burdens in the short term:
- Interest rate hikes are likely to continue at least until the first half of 2023 and until the major central banks have a feeling that they have gotten inflation under control.
- We align with the views of some of the major banks (i.e. JPMorgan AM, Invesco, etc.), whose base case scenario is that inflation will respond to weakening activity and head in the right direction and those recession scenarios are likely to be more modest across the globe.
- Bonds are back and more attractive than they have been over the last few years. Finally, bonds are returning back to their own basics, serving their purpose in their portfolios and giving back some return.
- Getting back to basics in investing: the “boring” long-term focused diversified portfolio made up of stocks and bonds becomes the way again. Taking care of our money, saving, and investing in a systematic long-term way is in again. There is perhaps less focus on quick wins. Having some real assets in our portfolios is valued again vs. following the new crypto trend.
- Blockchain seems to be here to stay but there is still a lot of uncertainty on cryptocurrencies and how they will perform and be regulated going forward
- Once we are through a recession or slow growth and pending the impact of interest rates, we may see growth return again, albeit less strongly. This means that technology companies (from semiconductors to AI, robotics, and much in between) should start to be attractive again but business fundamentals matter. The impending climate crisis will make sure that more funds go into key sectors that help us turn the path around like clean energy and the future of food.
What you can do for yourself and your money in 2023
1. Getting your finances in order
If you have not already done so in 2022, it is important to get your finances in order. What does this mean? It means creating clarity of where your money is coming from and going as well as knowing where you want to get to.
Budgeting has been a favored topic this year. We have seen prices rise like never before for most of us. Therefore getting an understanding of where our money is going is key. If you don’t have a clear budget, we recommend downloading our budget tracker. You can use this tool to understand where you have been spending your money over the last month or a few months. Once you have done this, you can analyze your spending and ask yourself these questions:
- Am I overspending overall or in certain areas?
- Am I spending in line with my values and goals?
- Am I saving enough or how can I start saving even more?
2. Defining your goals
There is no better time than the end of the year to get clear on what your financial goals are. You can focus on your next year but it is always best to think a little further out. For example, think about where you want to be financially in 5 years. Do you want to have saved a certain amount of money or perhaps you want to grow your investments to ensure you are building up your retirement?
Take a look at where you are today and think about what your financial goals for 2023 may be.
- Do you want to have better control of your spending?
- Do you want to have more income?
- Do you want to save more?
- Do you want to learn more about how to manage your own personal finances?
- Do you want to start investing?
- If you are already investing, do you want to switch your investments around? Do you want to have some new goals? Save for something else or start understanding better what your goals for retirement are.
Then think about how you can convert some of these answers and ideas popping in your brain to some very specific next steps. Write those steps down … writing our goals down is so important to start making them take shape.
Getting clear on our goals is so important to start driving us toward them. The next step is developing some next steps to getting that done.
Write each of your goals down and write some key steps that may help you get there.
3. Investing and making your money work for you
Investing is one of the best things you can do for yourself. You worked hard for your money, you worked hard on saving it so now make it work for you. Investing is the key to building future wealth.
You can learn all about investing by taking our Masterclass. That is perhaps something that can be on your goal list for next year if you are wanting to learn more about how to take the next steps in your personal financial life.
As I mentioned earlier, investing in a core diversified portfolio of stocks and bonds is the best place to get started. A core portfolio of stocks and bonds, weighted differently based on your return expectations and your risk profile, is the best way to build towards retirement. You can do this with Vitamin but in case you already do it with someone else, we wanted to share what we generally think may happen to the markets in the upcoming year.
Outlook for Equities
Equities have really been hurt this year. Generally, the stock markets are a leading indicator of the economy. Assuming a mild recession scenario and a slowing down of interest rate hikes in the first half of the year by the Fed, The ECB, and the Central Bank of England, we think a lot of bad news is already factored in. There may still be volatility and we probably still have not hit the bottom yet. Additionally, downward earnings revisions may still hit the markets, although some may already be priced in. We have good reasons to believe that stocks will be higher by the end of 2023. Income-generating stocks appear to be more attractively valued and dividends may provide more resilience than earnings.
Outlook for Fixed Income
The reset in yields for fixed income in 2022 means that bonds again have their diversification potential. Income from bonds is now far more enticing and given the drawback on bonds this year, the return potential is higher than it has been for a long time. There may be certain sectors like Investment Grade Bonds and High Yield which have even a higher return outlook. Overall though bonds are back to playing their role in diversified portfolios.
Outlook for further alternative asset classes
- Gold: Has not performed well in 2022, but the potential end of increasing interest rates could mean lower long-term yields towards the end of the year and potentially a weakening dollar. This is likely to support gold.
- Crypto: this is a hard one to predict given how much value has been lost in this asset class (if we can call it so) this year. Right now it is hard to tell where crypto is going. Some coins that have been around for longer may be here to stay. However, it is very hard to know the real value of these coins now. Therefore our recommendation is to use crypto as a satellite asset of your portfolio and allocate a maximum of 5% to it.
- Real Estate: Given the increased interest rates, real estate prices should be coming down. This may influence existing real estate fund holders in a negative way but this may be offset by the income potential of these funds. Regarding your direct investments in real estate, price compression may offer some investment opportunities in 2023. Real assets in general provide an opportunity for income with inflation protection over the long term.
Time in the markets is what matters, not timing the market
Averaging into the markets means investing every month (or any regular interval), a certain amount of money regardless of how your investments are performing. Why do we call it averaging in? Well because sometimes you will buy cheap when looking at the long-term (like now when the markets have been hit by the current economic conditions), and sometimes you will buy more expensive. When your investments’ values are down and their individual prices are low, you can buy more shares for your money. When investment values and prices are up, you’ll buy fewer shares. The key here is consistency and regularity and transferring a set amount towards investing every month. Although the stock markets are volatile, you will take advantage of those ups and downs and investments will tend to grow over the long term.
If you have saved a bunch of money, you can also do the same. You can split those savings and start going into the markets bit by bit, if you feel nervous to turn all your savings into investments at once.
What are you looking forward to in 2023?
There is no better time than today to start taking whatever your next step is toward your financial health. Perhaps you have been waiting to start your new side gig and create additional income. Perhaps you are about to have a kid and that is what is top of mind. Perhaps you have some savings that have been waiting around for a long time.
Sit for a second with those financials goals or even financial concerns and think about how great it would feel if you were able to reach them. Visualize a positive financial future and see the shifts happening they will take you in that direction.
If you have not yet started investing, get comfortable with the key concepts of investing and get your core investment portfolio going. Try out our Vitamin investment product – it is a super easy and intuitive way to kick off your investment journey.
If you have already started, review where you are and identify where you go next so that you can take the next steps toward financial freedom.
If you have any questions, we are here to help you. Reach out to us for a free consultancy here or start a financial coaching with any of our coaches in case you want to structure your individual plan for your best financial future.