What 2022 Taught Us About Investing
Over the past three years, we have seen some unusual circumstances. From the global pandemic, to supply chain issues, to record-high inflation and war in Ukraine…there has been no shortage of events rattling the markets. But, 2022 was the first year of negative returns.
Many investors began 2022 on a bit of a high after experiencing double-digit returns from equity markets during the previous three years in a row. But, 2022 was one of the worst years for all markets. The S&P 500 was down over -18% (the 7th worst year in the past 100 years), the NASDAQ was off over -33%, and the Bloomberg Aggregate Bond Index was down -13%. All of this may leave global investors feeling grim about the present and worse about the future, or at the very least, questioning their investing strategies.
It's in times of market anxiety that history can teach us a great deal. We find it valuable to look to the past for guidance. But, turns out you don’t have to look too far. There are many lessons to learn from the past year as investors, markets and the global economy were presented with significant challenges and opportunities.
What goes up, must come down?….but not permanently down!
Markets go up over time, but they do NOT go straight up, and 2022 proved this in a marked manner. We saw the highest trading day of the year occur on the second trading day of the year, January 4th. It was all volatility after that. We did see some gains in the fourth quarter, but they weren’t enough to make up for losses earlier in the year.
But, to an experienced investor, these dips are par for the course. There are an infinite number of factors that can contribute to a bear market, so it is impossible to predict when they will happen or how long they will last. But, we do know that 100% of the time, the market has come back stronger and rewarded the disciplined investor.
Market cycles are not new. They occur like ‘irregular clockwork’! Investing returns are a product of risk and return, and without the risk of market declines, we would not be rewarded with roughly 10% average annual historical returns in stock markets. The specific challenges facing markets are always different….yet the fact that markets go through cycles of peaks and troughs is the age-old story of being an investor.
In investing, we will have challenges along the way. There are structural issues that emerge from time to time; but the overall strength of our economic system has brought us prosperity and opportunity.
Navigating the Fed’s moves is better than running for cover
The Federal Reserve has dual mandates: (1) pursuing maximum employment and (2) price stability (inflation/deflation). The idea behind the popular phrase ‘don’t fight the Fed’ is to structure your portfolio in a manner which coordinates with Fed policies. There is absolutely some wisdom in this. For example, after inflation rose significantly and threatened one of their mandates, the Fed raised target interest rates in a historic manner (in both size and speed)!
In this instance, it was prudent to take note of the Fed’s aggressive policies, and the inverted yield curve, and make tweaks within your equity and bond portfolios accordingly. For example, focusing more on the shorter end of the yield curve during a rising rate climate is sensible.
An aggressive Fed doesn’t mean you have to run for cover, but it does provide the opportunity to make prudent tweaks to account for their changes.
When they say, “This time it’s different,”….it usually isn’t
This phrase is one that is thrown about in the world of investing almost every time there is a market dip. Pundits use it to exacerbate the fear that investors feel when markets hit a road bump. Here’s the secret….this time it IS different….and yet mostly….not much is different after all!
What was different? The speed and size of the interest rate hikes. In 2022, the Fed raised rates by 4.25%, making increases by 50 and 75 basis points every 5 ½ weeks. In total, this included seven consecutive rate hikes!
What’s the same? Challenge and opportunity! As Mark Twain famously said, “History never repeats itself, but it does often rhyme.” In 2018, just 4 years ago, markets weathered a ‘tech wreck’, 4 rate hikes, complex new tax law and a government shutdown, among other challenges! The market dip in 2018 was less severe than it was in 2022, but it is certainly interesting to see the parallels between the two scenarios – right down to the multiple rate hikes and outsized market moves from the technology sector! Happily, the dip in stocks and bonds in 2018 was followed by stellar returns in the following 3 years!
Make lemonade out of lemons
When almost every asset class goes down, you have to control what you can control. One of the few ‘bright spots’ in down markets is implementing a tax saving plan. This includes tax-loss harvesting, tax-swaps, even tax-gain harvesting within taxable accounts. There are many potential pitfalls in a tax-optimization strategy, so proceed with caution in terms of the implementation, and consult a CPA for any specific questions.
The importance of a plan
Prepare your portfolio for a variety of market and economic environments. Some of the challenges coming into 2022 were well telegraphed, such as the Fed’s aggressive path. However, others were less anticipated, like the situation in Ukraine and subsequent global fallout. Implementing a diversified, low-cost portfolio which is tailored to YOUR specific financial situation can help you navigate the knowns and the unknowns in a more measured manner.
Be like the markets and look forward
Economic data looks backwards. That means a recession is only announced once we are IN one! But, stock markets look forward. Focus on the future and the rewards you’ll reap for being a savvy, disciplined investor. After all, if you continuously stare at the ground, the sun will never shine on your face.