Is Your Investment Portfolio Down Big? Here's What to Do in 2023

If your investment portfolio is down big over the past 12 months, you're not alone.

2022 was the worst year for the S&P 500 since 2008. But for many investors that were highly concentrated in the technology, communications, and consumer discretionary sectors -- or growth stocks in general -- 2022 could very well have been the worst calendar year in their investing careers.

But just because a portfolio is limping into 2023 bruised and battered doesn't mean that it's time to overhaul your entire investment strategy. Instead, a smarter approach is to reflect on the big picture so you can better align your investments with your financial goals. If you're already aligned, then maybe the best thing to do is nothing at all. But oftentimes, there are a few tweaks you can make here and there that can go a long way. Here are three actions you can take now to help your investment portfolio.

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Don't get caught up in the noise

2022 was a rude awakening for growth investors, especially for folks exposed to unprofitable growth companies with nosebleed valuations. Having a few high-risk/high-reward growth stocks in your portfolio isn't necessarily a bad thing, but going all in on these kinds of businesses isn't a good idea.

The five-year period from the beginning of 2018 to the end of 2022 showcases how specific sectors can pivot between being in favor and out of favor, which can drastically impact short-term performance. From 2018 to the end of 2020, energy was the worst-performing sector in the S&P 500, losing 47.6% compared to a 40.5% gain for the S&P 500. But from the start of 2021 through last year, the energy sector was up a staggering 130.8% compared to a mere 2.2% gain for the S&P 500.

Similar in-favor to out-of-favor patterns can be found across virtually every sector in the S&P 500. But if we zoom out to the same five-year period from 2018 to 2022, we see that most sectors did decently well.

Data source: YCharts.*Return for the period from 01/01/18 to 12/31/22, excluding dividends.

In fact, all but three sectors landed within 25 percentage points above or below the S&P 500's return, with only technology outperforming that figure and communications and real estate underperforming.

The lesson here is that if you got caught up in the short-term movements of a single sector, it could have led you to sell energy and financial stocks too soon in 2020. And today, it could very well mean that a beaten-down sector like communications has some companies that could be worth buying because they are out of favor.

Decide what kind of investor you want to be and stick with it

From Warren Buffett to Peter Lynch, famous investors that have beaten the market over the long term have done so in contrasting ways. But one common throughline is that the best investors are consistent with their strategies and have principles that they stick to even if the companies in their portfolios change.

Warren Buffett aims to buy quality companies at a good value. If the quality deteriorates or the valuation becomes too expensive, he isn't afraid to exit positions and pivot to new companies.

For example, if we look at Berkshire Hathaway's top public equity holdings, we can see that over 55% of the portfolio is concentrated in Apple, Occidental Petroleum, Chevron, Taiwan Semiconductor Manufacturing, Activision Blizzard, BYD Company Limited, and HP. 

But at year-end 2015, none of these companies were in Berkshire's portfolio. And in fact, Berkshire held American Express, Coca-Cola, International Business Machines, and Wells Fargo as its "big four" investments. American Express and Coke remain top five holdings for Berkshire, but it no longer owns IBM or Wells Fargo. 

A big mistake that investors make is getting too emotionally attached to a company and not keeping track of the investment thesis to hold it accountable for executing on its goals. Buffett once said at a presentation, "The market knows nothing about my feelings. That's one of the first things you have to learn with a stock. You buy 100 shares of General Motors, now all of a sudden, you have this feeling about General Motors." Put simply, a stock doesn't know that you own it.

The lesson here is to establish a system that works for your portfolio, risk tolerance, and investment objectives, and then stick to that system instead of just investing in a certain type of company or stock market sector.

Identify foundational stocks to build your portfolio around

As discussed above, Berkshire Hathaway's portfolio looks very different today than it did seven years ago. But Coca-Cola and American Express remain foundational stocks in the portfolio. And you could say than Apple and Bank of America have grown to become core holdings that aren't going away anytime soon.

Having foundational stocks that you can build your portfolio around adds a level of consistency and stability. However, foundational stocks should still be put to the same level of scrutiny as other investments. It's just that a good foundational stock tends to hit its objectives.

Apple is a great example of an excellent, industry-leading company at a reasonable valuation that continues to achieve its goals. It can't control consumer behavior or the economy, but it can control its operations. And it has done an incredible job of building out its product and service ecosystem, growing its high-margin business, and generating gobs of free cash flow that it uses to buy back its own stock. Apple has the makings of a foundational stock. But suppose the brand deteriorates or the company's execution deviates from the investment thesis. In that case, it's important to remember that the stock doesn't know you own it and to not get too emotionally attached.

The path toward improving as an investor

Developing lifelong habits for successful investing is a far more productive endeavor than trying to rotate in and out of sectors or time the market. 2022 highlighted the dangers of getting caught up in a riptide of volatility and was a cruel reminder that valuations do matter and even great companies aren't worth buying at any price.

With many stocks on sale, 2023 can be the perfect opportunity to establish your own investing principles and then build a portfolio around those principles instead of merely buying a stock and hoping it goes up.