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Out with the Old, in with the New

Thomas O'Connor
January 11, 2023

A New Year is upon us, and for many investors, that is exciting news as we lick our wounds from one of the toughest years in the history of the markets, at least from a 60/40 portfolio perspective.

A traditional “balanced” portfolio of 60% aggressive positions (stock or equity) and 40% defensive positions (bonds or fixed income) make up a large chunk of the investor community, especially those who are nearer to retirement.

For such investors, it’s hard to believe, but 2022 was worse than 2008 in performance (by 3%), despite the stock market being down in 2022 less than half what it was in 2008.

 

How did this happen?

For the most part, both sides of the portfolio were affected largely by the uncertainty around inflation and the affect that would have on the economy, therefore markets. The year of 2022 has now been earmarked as “The Great Inflation.” In response to the escalating prices (9% at one point, the highest level since early 1980s), our country’s Central Bank, the Federal Reserve, had to act aggressively. In doing so, they increased short-term interest rates seven times during the year, moving from around zero to between 4.25-4.50%, the fastest and sharpest increase ever. Because of the inverse relationship between interest rates and bond prices (as rates go up, prices for bonds go down), this was the worst year in bonds since the Bloomberg Barclays US Aggregate Bond Index began in 1976. As a result, Intermediate term bond prices as measured by the Index was down 13% for the year.

Unfortunately, stocks in the US and across the globe didn’t fare better. US equities (as measured by the S&P 500) were down 18.1%, the 7th worst loss since the 1920s.

As a result, 60/40 investors were down 16.9% for the year for a 60/40 investor. In comparison, a 60/40 portfolio (with same benchmarks) in 2008 was down 13.9%, despite equities being down more than double what they were last year.

 

What should I be doing?

Investing is a journey, like any other. There are ups and downs, problems and trials, and uncertainty around every corner. Oftentimes success is found in how we respond when adversity hits. Below are two practical ways to help position yourself for success in 2023.

Stay disciplined. Resist the temptation to try to time the market. Institutional investors historically have outperformed retail investors for one main reason: emotion. They take advantage of fear-based investing – Fear of missing out aka “FOMO” as the market is doing well (which leads to buying high) and Fear of Losing as the market goes down (which leads to selling low).  This can be crippling to your portfolio performance. Do your best to remove emotion from your investing decisions and you will give yourself a greater chance to achieve your financial goals.

Stay focused. Having a purpose for your investing is vital to help you push through when the going gets tough. Ask yourself, “Why am I investing in the first place? What’s it for?” If it’s to achieve your long-term financial goals (whatever they may be), be encouraged that this volatility is normal and “part of the process”. It is because of environments like 2022 – not despite – that investors are able to earn the greater returns that help outpace inflation and achieve their financial goals. Staying focused on the why and remembering that these times are expected will help you make better investing decisions.

 

Onward

As we enter this New Year, let’s celebrate that 2022’s investing experience is behind us, and position our portfolio and mindset for success in 2023 and beyond.

 

Information obtained from third-party sources is believed to be reliable though its accuracy is not guaranteed, and Keel Point makes no representation or warranty as to the accuracy or completeness of the information, which should not be used as the basis of any investment decision.

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