Moving Forward Into 2023
It goes without saying that 2022 was a difficult year for both stocks and bonds. We understand it can be challenging, especially in the moment, to take comfort knowing that short-term market fluctuations are temporary. What is admirable is how disciplined investors persevered through an unrelenting cycle of bad news. Below we have summarized 2022 from a market perspective but more importantly, we want to highlight some positives to take away as we move forward into 2023.
For Retirees: Expected returns have gone up to rates not seen in a decade, so short-term losses are greatly offset by higher future income and expected returns when looking at an overall retirement plan.
For Savers: Recent market drawdowns present opportunities to purchase stocks and bonds at a discount today, along with higher expected returns on both looking ahead.
The key to remaining steadfast is your long-term financial plan, which can show you that you are still on track.
What to Remind Ourselves Coming Out of a Tough Year
In January 2022, we featured an article by David Booth, founder of Dimensional Fund Advisors, in which he shared why he remains optimistic about the markets.
He commented: “Markets will go up and down, but you should expect them to be positive, and that is what history has also shown.” Although the past year’s performance was not positive, we believe this statement continues to apply, which is why we remain optimistic about markets as well.
Moreover, headlines like “Wall Street ends 2022 with biggest annual drop since 2008” should be put into context when considering whether to make changes to a long-term financial plan. Markets bear uncertainty, and investors who remain disciplined are rewarded for that uncertainty without trying to predict or time the market. Long-term returns are compensation for enduring the risk that comes with investing. That is why there are silver linings for all investors to highlight from the past year.
Diversified Portfolios Provide the Best Opportunity for Consistent Returns
The data shows that following Forum’s academic approach should maximize the probability of a good long-term outcome for clients.
For instance, being an investor in concentrated technology portfolios felt significantly more painful in 2022, especially those concentrated in what had done so well over the previous decade such as so-called FAANG stocks. In 2022, the growth and technology-heavy NASDAQ Index lost a cumulative 32.5% compared to the more diversified Russell 3000 Index loss of only 19.2%. Further, looking back over the past 3 years, the Russell 3000 Index has come out ahead with returns of 22.7%, compared with 19.5% for the NASDAQ, cumulatively.
It is tempting to pursue investing in what some would call yesterday’s winners, which have done well recently, but the data tells us that is the wrong approach long term and that’s why we are so focused on having a diversified approach that is disciplined through market ups and downs.
Silver Lining in Your Plan if You Are a Retiree
A tangible takeaway from 2022 when looking ahead is that many retirees are better off long term due to expected returns increasing.
The impact of rising yields in the market now offers investors higher future expected returns. Portfolio values, particularly on the bond or fixed income side, have experienced a drop in exchange for improved yields not seen since before the ultra-low interest rate environment of the past decade. Similarly for stocks, when prices decline, prices going forward have a greater chance of a future positive outcome. Effectively, this trade-off consisted of a drop in current account values in 2022 coupled with an increase in portfolio expected return of 2.00%–2.25% annually long term.
Action to Take: As a retiree, discuss with your advisor what the impact of future expected return means for your plan and how this could change your sustainable spending going forward.
Silver Lining in Your Plan if You Are a Saver
For savers, as counterintuitive as it may seem, years like 2022 should be cause for celebration. Market declines make it a more attractive time to invest. Your contributions to long-term savings are purchasing a greater number of shares of assets at cheaper prices, your dividends are also being reinvested at cheaper prices, and you can capture the power of compounding with higher future expected returns going forward. That’s a triple win! It may not look like you are making strides right now, but if you have been saving continuously (at lower and lower prices), you are setting yourself up to be far wealthier in the future than had you otherwise paused on saving or investing.
We know that sticking to a long-term plan and holding steady has paid off for investors in the past, and we expect that to continue in the future.
Action to Take: As a saver, discuss with your financial advisor your current savings path and what this means for your long-term plan. Re-evaluate as necessary how much and where to continue saving.
We hold January in high regard because it presents everyone with an opportunity to appreciate all they have accomplished thus far and consider what they will do next. As we move forward into 2023, we appreciate your confidence in us to help you achieve your financial objectives and goals.
