Happy New Year!
For investors, 2022 was a pretty rough year. Especially coming on the heels of the ongoing gains since the Great Financial Crisis in 2008, it’s a shock to many newer investors to see losses of 10-30% (depending on the asset class) and in the 50-95% range for some individual stocks. Bonds were also down for the year, in some cases significantly, which gave us the rare year where both bonds and stocks had losses. Inflation was the main issue this year. The Federal Reserve raised interest rates significantly and quickly to cool the economy. This change in the cost of borrowing hit both stocks (especially technology stocks) and bonds hard. If you’d like a deeper dive into this year in the larger context of investing since the 70s, you can read this piece by Howard Marks.
It is always hard to watch our account values decline, even if we’re still up over the long term. Most of us suffer from some sort of “loss aversion”, where we feel losses more deeply than gains. In addition, we tend to “anchor” on the highest value our accounts have attained, another behavioral bias that affects us emotionally. That being said, here are a few bright spots when considering where the markets are now:
- Bond yields are higher than they’ve been in quite a few years. Bond yields are inversely correlated to bond prices. I.e. when bond prices decline (as they did this year) bond yields rise. Depending on the type and duration of the bond, yields in the 4% range and higher can be found.
- Lower stock prices generally indicate higher returns ahead. This isn’t a hard and fast rule but valuations of stocks do matter (Price/Earnings ratio, for example or the CAPE ratio). Note that a down year in 2022 doesn’t guarantee a rising market in 2023 but most of us are long term investors and what matters is returns over the next 5,10 or 20 years.
- The last silver lining I’ll note is that the market in 2022 has hopefully reset our expectations a bit. Stocks do not always go up and expecting 20%+ yearly returns is setting yourself up for disappointment. Here’s an interesting slide that reminds us that the market has historically risen 75% of the time but that yearly returns vary quite a bit.
My long-term principles of investing remain the same:
- Make investing a habit. Spend wisely, save regularly and invest for the future.
- Risk and return are generally correlated. Choose an appropriate asset allocation for your situation.
- Diversification is your friend. Diversify within and across asset classes and limit your holdings of individual stocks.
- Pay attention to fees. Costs matter over time and the expense ratios of mutual funds and ETFs can vary widely.
An important aspect of investing and financial planning is knowing yourself – your attitudes towards money as well as your financial and life goals.
Some questions for reflection in the new year:
- How did you react to the downturn this year? Did you consider it a buying opportunity? Did you avoid looking at statements? Did it distract you from other (more important) aspects of your life?
- Did you stay in the market despite the negative returns? Did you invest more, or at least regularly in a 401k or other retirement fund?
- Have you had major changes in your life in the last year? Or have you clarified some goals to focus on in 2023?
- Do your overall attitudes towards money help or hinder you in your life?
As always, feel free to reach out with any thoughts, comments or questions.