Which portfolios did best in 2022?

In 2022, a global earthquake hit the world’s financial markets.

If portfolios were people, the hospitals would be full.

But which portfolios did best?

Before awarding “top honours” let’s take a quick trip to the morgue.

Here lie casualties that too many people loved.

The crypto brokerage service Voyager Digital, filed for bankruptcy in July. Crypto exchanges FTX and FTX.US perished in November.

BlockFi is stiff with rigor mortis.

Three Arrows Capital, a crypto hedge fund, filed for bankruptcy too. Some believe the founders hid in a swamp for three weeks.

Leaving the morgue, we head up to the hospital’s Intensive Care or Critical Care Unit.

Here, we find undiversified investors foiled by crypto currencies. Last year, Bitcoin plunged 65.31 percent. It will need to gain 188 percent to break even from that drop. 

Non-diversified investors in the once manically popular ARK innovation ETFs are also in Intensive Care.

A few years ago, Cathie Wood, the 60 something year old, soon-to-be celebrity fund manager, stuffed her ARK funds with companies that (in most cases) hadn’t earned business profits. 

I explained this for The Globe and Mail at the height of ARK-mania. Investing in these things was like running a tightrope with a fridge. 

Cathie Wood’s flagship, ARK Innovation ETF (ARKK) dropped 67 percent in 2022. It will require a gain of 203 percent to break even from that drop.

But don’t hold your breath. It’s still mostly stuffed with companies that don’t make profits.

Leaving the Intensive Care sections, you’ll find reams of investors in regular hospital beds. Those in the roughest shape were, once again, not diversified. Many bought the previous year’s hottest stocks.

Tesla and Meta Platforms (Facebook) each plunged about 65 percent in 2022. They’ll need to gain 186 percent to break even from that drop. Amazon and Netflix shares each plummeted about 50 percent.

They’ll need to double to get back to last year’s level. 

We also hear crying from other beds. Plenty of these investors might have been diversified, but they chased hot stocks, dabbled in crypto or fell for managed funds that had (before they bought them) recently done well.

After leaving the hospital, we notice several investors chatting in walk-in clinics. They have globally diversified portfolios of index funds or ETFs.

Say what you want about bonds this year, they didn’t fall as far as stocks. And this helped keep portfolios out of the hospital and the morgue.

Measured in USD, portfolios comprising 60 percent in a global stock ETF and 40 percent in a global bond ETF dropped just 15.96 percent last year. Such investors will need to gain 18.84 percent to break even from last year’s drop. 

This brings us to investors playing tennis or walking around the park. They have the odd bruise. But other than that, they’re fine. They own globally diversified index-like portfolios endorsed by Nobel Prize winning economist, Eugene Fama.

Such portfolios are based on a 5-factor model. It’s technical stuff that you can read about here. But the most important component, or factor, is a higher than average exposure to “value stocks”.

Value stocks don’t spark water cooler conversations. They’re often boring stocks with high business earnings, relative to their price.

Over most rolling ten-year periods, value stocks beat their comparative, broad stock market indexes. They also tend to whoop popular growth funds. Warren Buffett cut his teeth on these sorts of stocks.

Value stocks also represent part of the framework for Dimensional’s globally diversified funds.

Measured in USD, Dimensional’s World Allocation 60/40 Fund portfolio dropped just 11.37 percent in 2022. Measured in GBP, it slipped a minor 5.41 percent.

Such portfolios would need to gain just 12.82 percent and 5.7 percent respectively to break even from their drops.

Smart investing isn’t about predicting the next hot sector. Almost nobody has done that twice.

Instead, we should embrace economic science. Whether you own a diversified portfolio of regular ETFs or a Dimensional portfolio with a value stock tilt, you’ll stay out of Intensive Care.

You’ll also thump the long-term returns of almost everyone you know.