This will be the last editor’s note prior to a holiday break. It is safe to say I’ve hit rock bottom with the holiday themes. This article started as the 12 days of Investing Christmas. That overly ambitious idea has been winnowed to 3 Christmas wishes based on the challenging year we have just been through.

I wish for greater insight into compounding

Think back on your life and the truly meaningful events. They are often moments that seem definitive. Yet in actuality they are the culmination of shifts so minor as to be almost imperceptible. The genesis of a wedding or a work promotion are thousands of seemingly meaningless decisions and the inertia that simply drags us towards an event that only appears pre-ordained in retrospect. Achieving an investing goal is the same. You are a millionaire. You’ve hit your retirement goal. You’ve purchased a house. The achievement is the result of many small actions that seem so small as to be insignificant at the time. And each of those actions are stitched together by the overarching will to not give up.

Compounding may be the eighth wonder of the world. But the power of compounding is frustratingly masked by its very nature. Progress towards a goal can seem so slow that it causes many people to just give up. Investing your first $1000 and earning a 10% return seems like little progress towards having $1,000,000. The first $100 you’ve gained leaves $998,900 to go. It is hard to picture how meaningful the same 10% return will be in the future. But it will be meaningful as the last 10% return you earn will mean a jump in your portfolio of almost $91,000 to reach your goal of $1,000,000.

It has been a hard year for many investors. Some have given up. Some want to give up as each new contribution is overwhelmed by a wave of losses. Just remember that even when it doesn’t feel like progress you are still getting closer to your goal just by sticking to your plan.

I wish that investors would do less

There is a great scene in the movie Forgetting Sarah Marshall, where Paul Rudd is teaching Jason Segel to surf. And Paul Rudd keeps admonishing him to do less. The less you do, the more you do. That is also good advice for investing.

Doing less seems like easy advice to follow. We spend most of our time struggling with motivating ourselves to do anything. And the rest of our time trying to get other people to do things. Yet there are a lot of forces trying to motivate us to act as investors. They are hard to resist. There is the image of investing as an active pursuit. A trader yelling into two phones while swivelling between monitors filled with pulsating charts tracking each gyration of the market. Investing terminology built on an ethos of activity. Build a portfolio. Beat the market. An investment industry that is always releasing new products. The 200 ETFs listed in Australia in March of 2020 has grown to over 300 today. Each ‘can’t miss’ new investment opportunity more ridiculous than the last.

For most people the secret to becoming a better investor is to do less. Think more. But trade less. Switch investment products less. Follow less fads. It is not an illusion that the holding you sell often does better than the one you’ve bought. There are countless studies showing this is a fact. The famous study at University of California at Berkeley shows that 504 days after a trade the holding that was sold outperformed the one purchased by 3.32%. Log into your brokerage account and take a look at how much you traded in 2022. Volatility often leads to increased trading as our action bias takes over. Perhaps you’ve over done it this year. The first step to a more successful 2023 is to do a little less.

I wish for an end to wishful thinking

Central bankers have an approach to communication that is guided by an awareness that their words can have a profound influence over markets and economies. They speak in measured tones but there is also no ambiguity about what they say. Once the illusion of the transitory nature of inflation dissipated the message has been clear. Interest rates are going up until inflation goes away and economic pain will be inflicted if necessary. You can and should be angry that central bankers let inflation get out of control. But clinging to the notion that we are going back to the good old days of zero interest rates is madness. That period was the aberration. What is happening now is that interest rates are normalising.

The same pattern has taken place repeatedly this year. In the face of consistent messaging from central banks investors continue to believe that rate cuts are just around the corner. That each interest rate increase will be the last. That any sign of bad news about the economy is in fact good news because it means that rates will go down. Each of these wishful thinking rallies this year have been dashed with a reminder of the situation we find ourselves.

The period from late March 2020 until the end of 2021 were a great time to be an investor. But just like the glory days of your past, they are not coming back. The reality is that investing when rates are at zero and when rates are normalised is different. Valuation levels are lower. Debt matters. Earnings and the ability to grow those earnings consistently is valued. It is a time for investors and not speculators.

My final wish is that you all have a chance to spend some time with loved ones over the holiday season. The entire team at Morningstar is thankful for your support and aware of the responsibility that entails. Our mission is to support all investors achieve their goals. We look forward to continuing our mission in 2023.