I started preparing data for this blog shortly after the S&P 500 index, which forms the basis of most passive portfolios (including Intelligent Investing strategies), broke the previous record set in January 2022. It reached a new all-time high and recovered from a two-year decline.

In our view, the past year demonstrated all the dangers of speculations and attempts to time the market. There was little reason for optimism back in January 2023. Inflation was still high despite the sharp rise in interest rates, war was raging just beyond the EU’s borders, and the profitability of the world's largest companies was falling.

Many other reasons for concern emerged during the year. In the spring, we experienced 3 of the 4 largest bank failures in American history. In the fall, war broke out in the Gaza Strip and brought fresh concerns about expensive utilities.

How did the markets fare during such a year? They grew rapidly. It began in the spring as a surge concentrated in technology stocks, fuelled by general enthusiasm for artificial intelligence. However, most of the global market growth came at the end of the year, when the investment world suddenly realized that inflation had slowed without triggering a recession, and interest rate cuts may be on the horizon.

Stock markets thus closed the year significantly higher than most people expected. In line with our expectations, bond indices have also started to recover, ending the year in the black.

This was the final result. During the year, however, markets used several opportunities to test the patience of investors. Bond indices spent most of the year in red numbers, with a sudden surge only coming during the last two months. Stocks also experienced an intra-year double-digit decline between August and October, only to turn around sharply afterwards.

Market recoveries have two tricky characteristics. They often emerge right at the time of greatest pessimism, as markets do not have high expectations in these periods, making it easier to pleasantly surprise them. Additionally, a major chunk of the subsequent returns often occurs over a short period. In the last year, they came mainly in November and December.

If you exit the market hoping to make a comeback at better prices, the expected dip will usually either not occur or you will fail to capture it. That way, you can easily miss out on strong months that create most of the full-year profits, needlessly depriving yourself of money.

That is why it is important to follow the lessons of intelligent investing: always stay invested and, should bear markets occur, use them to buy extra securities at discounted prices (the term "bear market" refers to a negative trend in financial markets when most investors sell assets and the decline since the previous peak has exceeded 20%).

How has Finax fared in this year full of doubts and opportunities? Has its passive approach paid off? The performance tables below provide answers.

If you are currently using a competitive investment product and the results convince you that your savings would be better off in Finax, feel free to utilize our investment transfer discount.

If you document a transfer of your investment from a competitor to Finax, we'll manage half of the transferred amount at no charge for two years, allowing you to pocket a higher net return. We accept a wide range of alternative investment options, including mutual funds, direct investments via a broker, investment properties, or cryptocurrencies. Learn more about the discount in this article.

Note on the Data Quoted: All data tied to the performance of the Finax portfolios represent the actual after-fee performance (stated before taxes) achieved by sample portfolios. We have described how we calculate actual performance in the article How Do We Calculate the Actual Performance of Finax Portfolios? Past performance is no guarantee of future returns, and your investment may also result in a loss. Inform yourself about the risks involved in investing. The currency used in the past performance calculation is EUR. The return of your investment may increase or decrease as a result of currency fluctuations if your investment is made in a currency other than EUR.

Tax Disclaimer: The stated performance figures are before taxes. The tax treatment of income from the sale of ETFs (which form the Finax portfolios) depends on each client's tax residence and individual circumstances and might be subject to future changes.

ETF Development

The chart below shows the performance of the ETFs that make up the Intelligent Investing portfolios. To make the graph easier to read, we have only included the 3 most and 3 least successful positions. However, you can see that even the less successful positions ended up in nice black numbers.

In 2023, passive portfolios gained most of their traction from the shares of US companies and large-cap European companies. Conversely, stocks of emerging-market firms (which were burdened by China's struggling economy) and bond-tracking ETFs (which continued to be pushed down by rising interest rates in the first half of the year) achieved lower returns.

All of Finax's positions ended the year in profit. As we expected, bonds also finished in the black, although their recovery only started towards the end of the year. For a while now, we've been emphasizing that bonds will become highly attractive once inflation slows down and central bankers stop raising interest rates. After years of zero rates, these securities finally have competitive yields and may eventually get extra support due to interest rate cuts.

Dynamic Strategies

As usual, we will organize the performance overview by the European Summary Risk Indicator (SRI). Its calculation method is determined by the European regulator, and all mutual funds in the EU are obliged to disclose it in their key information documents (KIDs).

As a licensed broker, Finax is not obliged to report this number for its portfolios. However, we compute it regularly to provide our investors with extra transparency and to allow them to compare our solutions to relevant competition more easily.

The SRI can have a value from 1 to 7. A higher number means that the investment carries more risk in the form of portfolio value fluctuations and the depth of its declines. In the world of investing, portfolios with higher risk should offer higher returns to compensate for the extra uncertainty.

Each of the tables below contains Finax strategies with the same SRI, ensuring they have a similar level of risk. You can also use this figure to compare Finax returns to competing mutual funds with the same SRI values.

In this table you will find the SRI values for Finax products as of 31.12.2023:

Let’s start by examining strategies falling into the SRI 4 risk category. These portfolios are usually called dynamic, as they invest primarily in equities and their value fluctuates more sharply. In exchange, they achieve higher expected returns over long horizons than their less risky counterparts.

You can see that all dynamic strategies capitalized on last year’s market recovery, earning attractive double-digit after-fee returns.

Like in any other year, there were some above-average sectors or regions which earned more than the global portfolio (this year, for instance, it was the technological sector and US stocks). Compared to funds focused on these stocks, the performance of our global portfolios was slightly hampered by the weakening dollar and the underperformance of equities in other regions.

Over the long term, however, such broadly diversified portfolios are preferable. Currency hedging unnecessarily increases the investment’s cost (reducing its long-term return), and broader diversification allows investors to capture the growing sectors and regions in different time periods, while also mitigating volatility.

Each year, a small fraction of investors manages to guess the right sector or country, beating a portfolio holding the entire market. However, it is difficult to repeat a successful bet each year. In other periods, these sectors or countries may be precisely the ones that get hit by declines.

That's why we often tell our clients that they shouldn't look at just one year when evaluating an investment. Longer horizons are more telling (for example, our robo-advisor will only allow clients to have dynamic portfolios when investing for the long term).

You can see that all Finax strategies maintain attractive annual returns even over the longer horizons of 5 years or more (approximately equal to the 8-10% long-run market appreciation that you often see in financial literature – which adds up to an incredible result if you let it compound for years). If you’re looking for a solution that unlocks these returns while requiring a minimum of your time and nerves, Finax is the ideal destination for you.

Be sure to read the pre-contractual information before opening your account.

Balanced Strategies

The SRI 3 risk category usually contains portfolios that combine equity, bond, and alternative investments. However, as the bond market has recently experienced its sharpest swings in a generation due to the sharp rise in interest rates, all strategies which invest predominantly in bonds have also fallen into this category.

Note that even the strategies composed mostly from bonds finished this year at a nice profit. We have been pointing out for some time that if inflation slows and central banks stop hiking interest rates, the bond market could become unusually attractive.

You can see that strategies mixed from roughly equal proportions of stocks and bonds maintained solid annual appreciation even over the longer horizon of the last 5 years. In contrast, Finax's bond portfolios have struggled in recent years due to rising interest rates. Some of them failed to avoid losses even on the 3- and 5-year horizons.

The primary factor contributing to the decline in these strategies is the relatively long maturities of bonds they’re exposed to. Longer maturities make bond prices more sensitive to changes in interest rates. When interest rates increase, bonds with longer maturities tend to experience a more significant decline.

The reverse, however, is also true. If interest rates start to fall, longer maturities ensure a sharper rise in portfolio value. There is, therefore, no reason to condemn these strategies; they may offer an interesting opportunity over the next few years.

Conservative Strategies

Finax significantly altered its offering of conservative products for short-term investing during the past year. In the summer, we introduced the Smart Deposit, our most conservative product and an alternative to savings accounts and time deposits. Its performance reflects short-term interest rates in the economy, which have recently risen to levels not seen in decades.

On top of that, we announced a change in the Intelligent Wallet’s composition in November, shortening the average maturity of its bond component and adding ETFs that replicate central bank interest rates. The original longer maturity of bonds made the portfolio overly sensitive to interest rate changes, pushing it into a loss during the recent rate hiking cycle. The rollout of the new strategy has significantly reduced this risk, while at the same time increasing the Wallet's current yield.

Initial results suggest that these products have a correct setup. Both portfolios have grown steadily over the past few months, with the Wallet achieving a slightly higher return (reflecting its higher risk relative to the Smart Deposit). We believe they will repeat similar results on longer horizons.

European Pension (PEPP)

The 2023 results of the European pension confirm why portfolios composed predominantly of stocks are the ideal choice when it comes to long-term retirement savings.

Despite having an identical composition as the Intelligent Investing strategies, our PEPP portfolios achieved even higher returns, as they have a reduced management fee: a mere 0.72% (including VAT) per annum. In exchange for this advantage, the savings accumulated through this product can only be paid out at retirement age.

The payout portfolio, in which we will store your PEPP savings while you draw your retirement income, has also performed very satisfactorily.

We have been long arguing that people should keep their retirement savings invested in a balanced portfolio even after they start drawing income from them. Since many of us will enjoy more than 10 years in retirement, the "bottom" portion of our savings will only be paid out many years after we stop working. That makes us able to survive even temporary declines in our portfolio’s value, as we have sufficient time to wait until the market recovers.

Thanks to this approach, you will continue growing your wealth even in retirement, allowing you to draw a higher overall income or leave a larger inheritance for your kids. Last year’s double-digit return on the PEPP's payout portfolio clearly proves this point.

If you want to save in the European pension, check out its product page (besides finding more information on the product, you can also open an account there). If you are an employer who would like to offer PEPP contributions as a work benefit, schedule a meeting with us using the button below. We will be happy to provide further details.