Adapted from my letter sent to my private wealth management clients on February 15, 2023.

Investing in 2022

SNAP! Most stock asset classes fell into bear market territory, and it was generally, the worst year for stock returns since 2008’s Global Financial Crisis!

CRACKLE! A plunging bond market recorded one of its worst years ever!

POP! “Safe money,” cash in the bank, by most measures, lost nearly 10% of its purchasing power due to soaring inflation.

2022 was a year that tested us as investors!

The DFA quarterly market analysis linked below contains specific 2022 performance numbers for various asset classes. Within the broader market sell-off, some areas of the market simply “broke” and suffered massive losses:

Technology: The hottest sector of prior years suffered shocking declines. A couple of examples:

Ark, one of the hottest and most talked about technology stock funds with a super star manager finished the year losing two-thirds of its value!
Meta, a once of top five S&P 500 index company with one of the world’s most visited digital sites, lost 25% of its value in one day—TWICE!!

Speculation: In a recent conversation with a new prospective client, I learned their cannabis stock holdings have fallen more than 90%. This was a stark contrast to a year or two ago when I received daily voicemails and emails from cannabis company fundraisers encouraging investment.[1] There was a wide spectrum of previously “hot” securities and trading techniques, which simply did not meet our standard for portfolio inclusion, that suffered greatly in 2022.[2]
Cryptocurrency: One of the least surprising financial events was the cryptocurrency meltdown with trillions of dollars lost, thousands of currencies failing, and surrounding fraud and theft.[3]

As expected during a broad bear market, portfolio strategies everywhere bent under the strain, but of critical importance, our portfolios and financial plans did not break!

Despite a modest “bend,” we are feeling good about several key decisions that helped us avoid having financial plans come anywhere near the breaking point and have been able to enjoy the Q4 2022 and current Q1 2023 rally.

What did Work in Investing in 2022?

We always implement core strategies, such goals-based investing and diversification to help protect our clients’ portfolios and financial plans from breaking. These fundamental strategies, along with a few key tactical decisions and recommendations, had us well positioned for 2022’s “Snap! Crackle! Pop!”

Asset Allocation Decisions & Investment Selection

First, as always, a broadly diversified financial portfolio is a requisite to a solid portfolio. Second, in stocks, our portfolio tilt into “value” stocks, and away from “growth” and technology stocks, helped us avoid the worst of 2022’s stock market sell-off.

In early 2021, I wrote: “For some time, we’ve been watching a large run-up in stocks with high price-to-earnings per share ratios, and, in particular, have been cautious around the market concentration in a very small number of very large technology companies. We have worked to manage our exposure to these higher-priced “growth” stocks and tilted into shares of cheaper value-oriented companies, smaller stocks, and those with higher profitability.”

This chart from Morningstar provides a stark look at the significant outperformance of value versus growth stocks in 2022:

A similar tactical weighting was important in bonds. A decades-long bond boom had us taking a healthy weighting in short-duration and unconstrained bond funds, which held up comparatively quite well during the bond market’s interest rate spike and broad sell-off.

As an inflation hedge, we advocated I Bond purchases, and the advanced purchase of items needed in everyday living to maintain purchasing power, save time, and achieve volume discounts.[4]

Financial and Retirement Distribution Planning

Our financial planning work helps prevent a “sequence of return risks” scenario—selling depressed assets to meet spending needs during a down market, which can dangerously shorten retirement funds—and ensure client portfolios are designed to reliably meet cash flow needs during market shocks. Repeatedly stress-testing financial plans with Monte-Carlo Analysis allows us to examine all kinds of scenarios and to ensure we’ve built a “crumple zone” into financial plans!

Investor Discipline

Stocks spiked upward in the fourth quarter of 2022 and early 2023. Only the history books will tell if we are truly past the bear market of 2022. Although many financial “experts” claim to be able to predict the future of the market, no one actually knows how the market will behave in the future. While we are certain there will be many stressful market periods ahead, we also retain great confidence in the long-term performance of our portfolio strategies.[5]

Taking the route of a short-term pessimist and, simultaneously, a long-term optimist, and sticking with a solid financial plan has created abundance for many investors during their financial journey.[6]

Wealth Management Advice

Upcoming Wealth Strategy Sessions

Future Webinars

Secure 2.0. On February 23 at noon, our wealth strategy team will cover the many new tax law changes and planning opportunities in the recent Secure 2.0 tax bill. Join us to learn more about these changes, as well as how we will evaluate individual planning opportunities around this bill over the course of the year.
“Margin of Safety.” Jay Lisowski, CFA, SVP at First Eagle Investments will join me on April 5 at noon, to discuss First Eagle’s investment approach, including how they attempt to deliver diversification from the masses, protect value with their “margin of safety” approach, and their view of the markets.

Recent Webinars

I’ve hosted some fantastic guests on recent webinars as well:

Top Tax Planning Strategies. Kevin, Derek, and I discussed top year-end tax planning strategies. We’ll be considering many of these same strategies for clients as we move through 2023.
Road to Retirement. Scott and Andrew Rice, Director of Advisor Solutions at Thornburg Investments, discussed their research into the “Endowment Spending Policy” and the role of stock dividends.
Cash Balance Pension Plans. Scott and Jason Bolstad, Plan Design Consultant with Tax Sheltered Consultants, discussed how cash balance pension plans can provide a super tax shelter and rapid wealth accumulation for certain business owners.
ESOP: Employee Stock Ownership Plan. Scott and Steve Storkan, CFP®, Executive Director of The Employee Ownership Expansion Network, talked about how ESOPs can allow for a tax-advantaged transfer of ownership from business founder to employees. This is a niche topic most applicable to business owners considering exit strategies.

Money Matters

I covered several key financial topics on my recent “Money Matters” radio segments:

Disasters & Emergency Preparedness

I have long advocated for adding a financial and time allocation to the physical skills and tools of emergency preparedness. Many events and outcomes are simply out of our control, but as I regularly preach in my Bull Moose Patrol classes, oftentimes a bit of planning and preparation can help stack the deck in your favor in tough situations. Hurricanes pounding Florida and the devastating earthquake in Turkey and Syria offer powerful reminders that “IT” CAN HAPPEN! Here are a few of my posts with recommendations in this area:

Focus on the Road Ahead

There will certainly be more periods of financial stress in the years ahead, and like a new car, sometimes getting that first ding or bent fender is the most painful, but we have confidence that by sticking with the plan, you’ll get where you need to go. In my last letter, I encouraged this mindset with the thought that “Investing, when well played, can be an infinite game—one with no whistle to signal the end of the game. Historically, when market turnarounds happen, they have often done so with surprising abruptness and impressive gains.”

The fourth quarter of 2022 brought strong stock returns, and as of market close, February 10th, the S&P 500 is up 6.7% YTD for 2023. Only by looking in the rear-view mirror when we are miles down the road and enjoying the view from new market heights will we know if we are through the worst of it, but we have successfully traveled through 2022’s broad bear market unbroken.

Questions About Your Financial Portfolio?

If you have questions about your financial portfolio, please feel free to contact me anytime.

[1] “A counterintuitive trend coming out of the early 2020 market crash is the rise of the new day trader, many of whom operate on the popular tech platform, Robinhood… Unlike the Robin Hood of fiction, who “stole from the rich to give to the poor,” short-term trading typically flows the other way. Small-time neophytes investing in stocks inevitably lose to the large professional players on Wall Street.”
~ Scott Oeth, Holding Course During Crisis
[2] Money Matters: Market Speculation & Your Portfolio
[3] “I would not advise you to put one dollar more into cryptocurrencies than you can afford to lose!”
~ Scott Oeth, Does Cryptocurrency Fit into My Financial Plan
[4] Four Financial Benefits of Stocking Up for an Emergency
[5] “Very importantly, I think it's thinking ahead in a moment of calm and when you have some breathing room and some white space, planning ahead, “How will we react when bad times come? How will we make decisions? How will we make decisions about when to sell or when to trade?” And doing so in a time when it's not in a panic or a crisis situation. I think that's very important.”
~ Scott Oeth, “Money Matters,” 2020 Financial Lessons
[6] “Things do get better over time, and the key is making prudent decisions, having a plan, sticking with the plan, and giving it time.”
~ Scott Oeth, “Money Matters,” Managing Money in Volatile Markets