13 min read

Investing During Uncertainty, Looking Back At 2023

I only wrote one newsletter of 2023, I lacked focus with it so it was an easy thing to put on the back burner. I wrote too much about things that were happening in the present, things that over our lifetime, really have no impact on our investing success. But after taking some time from it, and really thinking about what's important to me, I'm back with a new focus, new direction, and new commitment to writing.

The reason why I bring this up, is because in that one and only newsletter of 2023, I looked back on the year that was 2022, and declared my optimism for the year ahead.

2022 was a historically bad year for investors. It was a rare year where it didn't matter how you were invested (conservative, balanced, aggressive), you felt it. So I can see how it might have made sense, or been easy to jump on the quite full 'doom and gloom' bandwagon. Even the 'pros' were all in on a terrible 2023. But I was as optimistic as I've ever been heading into a brand new year.

The truth is, more often than not, we can find reasons not to invest. Whether it's negative news headlines, market uncertainty, or pessimism. But that's true for every year that has ever been, and we know that investing has always been more successful than not. Today I want to take an in depth look at investing during uncertainty, and why 2023 turned out to be a perfect year to reflect on while doing so.

Key Takeaways:

  • Uncertainty is a constant in markets, because no one knows exactly what will happen next. But that's always been the case, and markets have produced exceptional long term results.
  • We will face things for the first time in our lifetime, but it is rarely the first time that thing has ever happened. By looking to the past, we can find similar situations and have a better idea of what might happen in the future.
  • The key to making something scary into something familiar is to better understand it. By better understanding investing and uncertainty we can make better decisions for our future selves.

Where 2023 Began

In 2022, the S&P 500 finished the year with a -19.4% return, one of the worst years in history, and the bond market had its worst year ever by multiples. Inflation and rising interest rates were still making everyday life problematic for a lot of people, with no clear end in sight. It was a difficult year, and a year that could be very discouraging about investing moving forward.

Even the professionals were predicting a negative 2023. News headlines predicted as high as a 100% chance of a recession occurring, and Wall Street forecasted its first negative year this millennium, by the way: 6 years so far ended up being a negative return year. If you were just reading the headlines, 2023 seemed to have no promise at all.


To consumers and retail investors, things felt uncertain. To the professionals, it was entirely certain that it would be a negative year. As an investor, it really wasn't what you want to hear. You might be asking yourself 'Derek, so then why did you feel optimistic?', it's a fair question, and for me, a fun one to answer.

Something that I've been coming across a lot recently in books that I've been reading, is the idea that during our lives we will experience a lot of things for the first time, but it doesn't mean it's the first time that thing has ever happened before.

It's the driving force behind Ray Dalio's Changing World Order, where he explores the rises and falls of great world empires throughout the modern world. What Dalio finds, is with each rise and fall, the same patterns emerge, the same process and variables that lead an empire on an upward and downward projection. We will experience things for the first time in our life, but they've happened before, sometimes, many times before.

It's a simple principle, and by looking back, we can find similar situations to what we are experiencing, and through the experience of others, we can form a more accurate idea of what might happen next.

With that in mind, I looked back. 2022 was one of the worst years in history for the S&P's performance. But what happened in the years that were even worse? Going back to the Great Depression, there had been four years when the S&P had a worse return than 2022, they were:

  • 2008: -37.0%
  • 2002: -22.1%
  • 1974: -26.5%
  • 1937: -35.0%

But here's what happened in the next year in each case:

  • 2009: +26.5%
  • 2003: +28.7%
  • 1975: +37.2%
  • 1938: +31.1%

A positive return, and much higher than the long term average of the S&P 500. Now, past results do not guarantee future returns, so this didn't promise great returns in 2023. But it shows that historically, we have data that we can use to get an idea of what might happen in the future, even if it is nothing more than just an idea. This data suggested to me that there was reason to be optimistic about 2023.

Since our data was only comprised of four years worse than 2022, it was very limited. So I put together data showing a specific year and its next year from 1928 to 2022. For example, it would look at 2021 on the X-axis, and 2022 on the Y-axis. Here's what the data looks like:

S&P 500: Given Year (X) and Its Next Year (Y) Annual Return (1928 to 2022)

Admittedly it's tough to see, even for me and I made the chart, so I find this to be an easier view to really make sense of it:

S&P 500: Given Year (X) and Its Next Year (Y) Annual Return (1928 to 2022)

Even without diving into the data and numbers, we can make a couple of insightful observations:

  • We have far more positive first years, than negative first years (more points on the right than the left)
  • We have far more positive second years, than negative second years (more point on the top than the bottom)

By looking back, we have a lot of information. Going back to 1932, the years with a worse annual return than 2022, were followed by years with a return much higher than the long term average. By looking at 94 points of data that compares a given year and its next year, we find that there's a much greater chance of a year being positive than negative (for both a first year and a second year).

Regardless of what the general consensus thought 2023 had in store for us, I hope you can see what my optimism was built on.

Understanding Uncertainty

At any given time, there can be uncertainty about markets. Whether it's volatility, personal opinion, media headlines, or natural market flows. Uncertainty can be real, or it could be fictitious, but in either case, it doesn't mean it's always relevant. A diversified investor with a 40+ year time horizon, shouldn't be concerned about a quarterly earnings report, even if it makes headlines.

We often think about uncertainty in the negative direction, when markets are trending down. But it's more important to think about uncertainty and markets as a whole, as a constant factor. It's an idea I've been thinking about a lot recently, it's raw, but maybe it makes sense. In my head, it looks like this:

The chart consists of natural market movement, an investors sense of 'confidence', positive movement certainty, and a reasonable price zone (blue shade).

Markets naturally move up and down over time, but luckily for us, much more so up. At any point, markets can be considered: fair value (within blue shade), overvalued (above blue shade), or undervalued (below blue shade). An undervalued market is like it being on sale, while an overvalued market is like paying a premium. Markets naturally fluctuate between these different zones, they always have, and always will.

When markets move up and become overvalued, at a point prices stop making sense, so the price becomes less certain as it becomes more unpredictable. But at the same time, investors can feel a sense of 'confidence' that the stock is unstoppable and going to the moon.

In the opposite direction, as markets move down, prices become more stable, even falling into the range of being on sale. Even though things are becoming clearer and more certainty, investor 'confidence' falls along with the price, until investors have no interest in investing. It's an inverse relationship, and like many things with investing, a thing where our gut instinct or intuition can lead us astray.

Let's look at a real life example, remember GameStop (GME)?

I believe that more people were talking about investing and the stock market during the run of GME than ever before, and that looks to be true. GME hit its all time high on January 27th 2021, the same week that Googling peaked for both "GME" and "How to invest", a very dangerous combination. As of this article, GME is down over 80% since then.

Google Trends for "GME"
Google Trends for "How to invest"

At its peak, GME was by far the least certain that it ever was, yet investor 'confidence' in the company was never higher. It's an interest dynamic, one that anyone could get caught up in.

We often think that a falling market means uncertainty. But I would argue that a falling market provides certainty, and clarity moving forward. It's a correction back to reasonable pricing, and an opportunity to go back in time in the markets to buy at lower prices. We often view overvalued markets or stocks with unwarranted certainty, when they are actually at their most uncertain. Understanding the relationship between markets and uncertainty is important, because in a lot of cases, our intuition is backwards. Even if we are just able to align uncertainty with hot stocks, that in itself, could save us a lot of future anxiety and FOMO (Fear of Missing Out).

Investing During Uncertainty

If we accept that uncertainty is a constant factor in markets, then we have to find a solution to deal with it all of the time. Especially if we consider than uncertainty has always been a constant, and markets have still ended up producing great results. Uncertainty isn't enough to turn us away from investing.

The first place to start is building a foundational knowledge of how investing works. You don't need to dive off the deep end here, but it's important to be able to have a conversation about your money and understand what it's doing for you. Learning could look like reading a blog (like this one), having a conversation with your Financial Planner, listening to a podcast, or reading a book. There's a lot of resources out there, so you can find a medium that works best for you.

If you're into podcasts, Peter Lazaroff's The Long Term Investor Podcast is one of the most educational and practical resources out there, one of my favourite episodes is EP 10: The Secret to Timing the Market. Or if you prefer reading, Morgan Housel's The Psychology of Money is an exceptional book full of powerful, easy to read stories about money and investing.

After building a foundation, the next important step is setting expectations. Even in years with phenomenal returns, we experience significant volatility. Below is a chart that compares a year's annual return to its largest drawdown.

S&P 500 Annual Returns vs Intra Year Drawdown (1980 - 2023)

If by some miracle you never experience a negative annual return for the rest of your life (while still being an investor), you won't avoid seeing volatility throughout those successful years. Investing is a lot more psychological than most people realize, and a big part of that is to understand how to survive the tough times.

Going back to the beginning of this article, there's value in understanding what has happened in the past, to give us a better idea of what might happen in the future. We may experience a market crash for the first time, but there have been countless throughout history. Looking at the above chart, there are 7 of the 45 years (about 1/7) that experience a drawdown of at least 20%. Going through that for the first time might feel scary, unusual, and maybe even give you end of the world vibes. But understanding that it happens with a regular frequency, is reassuring.

It's also important to set realistic expectations for returns. Like most good things, investing properly takes time. The secret to Warren Buffett's success is that he's been able to invest for such a long time, it's that simple. But for some reason, investors can feel entitled to taking a shortcut that makes them an overnight millionaire. Instead of taking a tried and tested approach of investing over our lifetime, investors can get discouraged when they don't see immediate results and quit altogether.

Instead of unrealistic expectations, looking back to the past can give us guidelines for what to expect moving forward. The information below shows us how different portfolio allocations have behaved in the past. By using this information as a guide, we can have clearer expectations for our own investments, and have a better understanding of what would be considered normal performance, which should ultimately provide more certainty (and less stress) during those volatile times.

Vanguard Historical Index Risk/Reward (1926 - 2019)

After building a foundational understanding of how investing works, and setting realistic expectations based on past data, the final step would be to build an uncertainty proof plan. A plan that's straightforward and easy to follow, so that during times of uncertainty, you're able to block out the noise and focus on what you can control.

In the chart above, we can see that even in a conservative portfolio (bond heavy), we still see significant volatility (worst year -15.07%). But even considering that, we see a great average annual return of +7.21%. Those annual returns incorporate the good, the bad, and everything in between. The best thing we can do for our investments, is leave them alone for as long as possible. Being able to do that stems from confidence in your plan that no matter what happens in the short term: it's accounted for, and in the long term: it won't matter.

Having a plan that outlines what you need to do for the next X amount of years to build your ideal lifestyle, will tell you exactly what you need to do and define what parameters it's designed within. It's almost certain that a plan would be designed slightly on the conservative side of things, providing a situation where your reality would be slightly better than the theory. In a case like that, assumed investment returns will be single digits, reassuring you that you don't need to take huge risks in order to meet your goals. So it doesn't matter what the new hot stock or trend is, you don't have to chase. There's a lot of comfort in knowing exactly what we need to do to see the success we're looking for.

Where 2023 Ended

Again, it's important to understand that past results don't guarantee future returns. But, the big question, was my optimism warranted, or was I a delusional dreamer? Well, here's how things ended up:

  • 2022: -19.4%
  • 2023: +24.2%
S&P 500: Given Year (X) and Its Next Year (Y) Annual Return (1928 to 2023)

Like the 4 years worse than 2022, 2023 had an above average rate of return. Our newest data point (marked in yellow), now gives us a total of 95, so let's look at the numbers.

We have a positive first year 68.4% (65/95) of the time, which is actually the exact same odds of a positive second year (regardless of the first year).

Additionally, if a given year is negative, the following year is positive 73.3% (22/30) of the time. Which is actually higher than the chance of a positive-positive situation occurring, at 66.1% (43/65) of the time.

In every case, no matter if we look at a given year as a first year or a second year, the chance of it being a positive year is much greater than the chance of it being a negative year. Showing that no matter what's going on in the markets, it's always the best time to be an investor.

Looking Forward

I believe it's important to have the mindset that the future will always be better than the past. It might not always feel like it, but overall, we experience positive progress. We continue to see life expectancy and quality of life increase, developments in technology and medicine, all leading to a better future. That mindset applies to markets too.

I will always be optimistic about markets, and it simply comes down to having an understanding of them. Fear is derived from unknowing. Sometimes it takes a while, but by learning about what we don't understand, we can make it more familiar, and less scary. Afraid of investing? Simply learn about how investing works.

2023 turned out to be the perfect year to reflect on with uncertainty, because it was the year that was most certain to be exactly what it wasn't. Wall Street was so certain that they predicted their first negative year this millennium. Some headlines reported as high as 100% certainty that a recession was in store for 2023.

There's always uncertainty in the short term with investing, uncertainty for the bad but also for the good. Uncertainty can mean pleasant surprises. At the beginning of 2023, it seemed as good a year as ever to sit on the sidelines and wait for a better year to invest, but you would have missed out on fantastic returns.

So why were opinions so wrong? It's because no one really knows what's going to happen next. The best someone could say is: next year markets might go up or markets might go down, but over the long term markets will go up far more than they go down which will result in exponential growth. Over the long term, the fog of short term uncertainty clears. The longer we invest for, the more certain our results become.

By creating certainty within ourself, our progress, and our plan, we can more easily block out the uncertain noise that really doesn't matter. It's unfortunate that there's so much focus put on things that won't matter. Sure, short term events can cause fluctuations, but over the long term that noise ends up equaling a ripple, not the wave that it's made out to be.

Keep doing things your future self will thank you for.