Here’s our take on what happened in the markets in 2022, and how a long-term plan can help you regardless of what happens in 2023.
TRANSCRIPT:
Clayton: Hi, I’m Clayton from Squire Wealth Advisors and with me today I have Nathan Larsen, who is one of our partners over the Squire Wealth Management group. Nathan, thanks for joining.
Nathan: Yeah, happy to be here.
Clayton: So we wanted to go over 2022–what happened in the markets in 2022, talk a little bit about inflation because that’s kind of the buzzword right now, and get into what/how does this impact our portfolios, how can we look at our portfolios, and kind of going forward from all this. So Nathan, hit us off. Tell us a bit about what happened last year in 2022.
Nathan: As you probably know, we had a rough year in the markets in 2022. We’re going to show some slides here but the US market in general, the stock market, was down just under 20%. The international developed market did a little better but it was still down 14%. Emerging markets were down 20%, real estate was down over 20%, and probably the hardest part about last year was the hit that bonds took. So bonds were down quite a bit around 13% or 10% on the global level, and that’s really tough. We look to bonds as a risk reducer and a stabilizer in our portfolios, and having that performance in bonds was difficult. The good news with bonds though is interest rates have come up and so instead of earning 1-2% on bonds we can expect to earn a little bit more now. Those rates, those yields that are portfolios are in will start to come up. Looking longer term, it’s been a great run. We’ve had some challenges economically and politically but the market still has provided positive returns for the most part over the five- and ten-year periods, so there is hope for the future. And a down year about every 7 years or so in the market–the market has a 20% correction. We can’t time when those are, and so we stay diversified and take a long-term approach.
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Clayton: And if I may, Nathan, 2022 is an unusual year. It’s not common for stocks and bonds to all be down. They don’t have a perfectly inverse relationship but it’s common when you have stocks down, bonds are up or vis versa. But very unusual to have them both down, and down as much as they were. So it was an unusual year for sure.
Nathan: That’s a good point. The bonds are really interest rate driven, so we had really low interest rates for so long. Inflation started to creep in and so naturally the Federal Reserve raises rates and whenever that happens, we’re kind of — rates aren’t even high, we’ve just raised them from really really low to kind of more normal — and that did take a hit on bonds. But like I said, the good news is in the future we’re actually earning some reasonable interest on bonds and fixed income.
Clayton: That’s a great point. So talk a little about inflation, Nathan. Tell us about what we can expect. What’s the market telling us about inflation?
Nathan: Inflation has been very high. Everybody knows this. We had high gas prices. Really, really rampant high inflation. Looking forward though, the Federal Reserve has taken some pretty aggressive actions and the market as a whole is kind of predicting that we’re going to come back to normal with inflation. Over the one year to the next 20 years, the market is really predicting a normal inflation around 2%, maybe 2.5%, something like that. The Federal Reserve is targeting inflation just around 2%. It’s hard to think this is going to happen, but we’ve already seen gas prices come down. There are other forces at work here that should start to tame inflation.
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Clayton: That’s great. One of the things that I think is really helpful to look at – if we look at another slide here – we talked about how 2022 was not a good year, but when we look historically at what has happened in the past after a 20% drop in the stock market, and what happened in the following year, the data is pretty enlightening, to show you that it’s not all doom and gloom. So if you look at the slide that we have, it’s showing that yes, there are years where the market continues to go down following a 20% drop in a given year, but there are also a lot of years where it’s an exceptional year in the stock market. And if you look at the very end of the slide, in the dark blue, the average return the following year of a 20% drop is 12%–which is great! That is above the US stock average of 10%, if you’re looking at the S&P 500. So I think the message to our listeners is yeah, it’s not been great, but that’s not what we expect going forward. We always expect a premium in the market when we’re investing, otherwise we wouldn’t invest. So there’s hope there on the horizon that things are going to go better in the future.
Nathan: Great point. This slide here really shows us that in order to get that 10% average that the S&P 500 had, you really have to go through some of the years like we just had, where you’re down 20% and then other years you might be up 20 or 30%. But over time, really what’s happened over the markets is investors have been rewarded for being patient and sticking with it, and definitely after a downturn it’s not the time to really panic and worry because history tells us that there’s usually a recovery. There always has been, and we expect there to be another one. And we’ve started to see that the end of the 4th quarter in 2022. We had a pretty good rally, and so far this year we’ve had a decent rally. We don’t know the future but we know that history has rewarded investors for being patient and staying in the market.
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Clayton: That’s great. I think that’s a great segue into the last point we want to talk about–this idea of what the cost of mistiming the market is. We don’t advocate for timing the market and trying to get in or get out and figure out what’s going to happen. The research shows that’s a loser’s game and if we look at this slide here, this graph, showing us what’s happened in the last 40 years if you were to take a thousand dollars and hypothetically invest it in the stock market. The investment over 40 years has grown to about $131,000. If you had missed just the very best day, that return is now $117,000. And a dramatic drop if you missed the best five days. So just trying to figure out, ‘oh, we think this is going to be a bad year so let’s take our money out’ — you can see from the data it doesn’t go well for investors.
Nathan: Great point. It’s a loser’s game and really, if you think about it, you would have to guess right twice. You would have to guess when the right time to pull money out is, then you again have to guess when the right time is to put money back in. And the real problem is that the market is so volatile on a daily basis, especially around these difficult times that we’ve been facing, and it’s just virtually impossible to time it and the best approach is to do the right planning, work with your advisor, get the right investment plan and an overall risk strategy and tolerance in place, and then stick with it. I don’t have a crystal ball, none of us do. We can’t–we don’t know when the good days are going to be, when the bad days are going to be, but over time investors get rewarded for having a well-thought-out plan and sticking with it.
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Clayton: That’s great, Nathan. The last data point I want to mention is that is very interesting to me, when you look at the slide we have up, if you look at the last 20 years, 7 of the best 10 days occurred within 15 days of the 10 worst days. So they’re really close! And to try to get out, you’re gonna miss some of those upside dates that often are so close to the bad days. I think the message that you’re sharing, and that we totally advocate here at Squire, is have a good investment strategy. Stick with it and ride those ups and downs, because in the end that’s really the best strategy for your portfolio.
Nathan: That statistic is crazy. We kind of experienced this a bit last year. The market was actually down more than it ended up because we had that rally in the 4th quarter. Without that rally, had an investor maybe panicked mid-year, they would have experienced way worse of the loss than if they would have just stuck with it the whole year, and even into this year. We’re starting to see markets come up and performance improve, really the best approach is just to stick with a well-thought-out, diversified plan.
Clayton: Perfect. Well that’s it, thank you Nathan for joining us, and thank you for those watching here. If you have any questions feel free to reach out to us. Our contact information will be in the notes below the video. You can reach out to us at Squire. Any of us, we’re happy to help and work on your portfolio or financial plan. Thank you.