Last year showed us what investing in one of the worst financial markets in history looked like — and it wasn’t pretty. But investors will learn more about themselves during a bear market than a bull market. While we didn’t see the gains we wanted, we did gain a little bit of perspective with a few important lessons learned over the last year.
1. Anything is Possible in the Short Run
Typically, if the stock market falls, bonds are there to pick your portfolio back up. But that wasn’t the case in 2022. Something that we’ve only ever seen three other times in recorded history happened — stocks and bonds fell simultaneously.
So why did this happen? Well, we know that the Fed hiked interest rates up, which was part of the cause of stocks falling in the first place. With bonds at such a low yield, losses were larger than ever before.
The U.S. stock market fell over 18%. The aggregate bond was down 13%, while 10-year treasuries fell over 15% and long-term government bonds fell over 30%.
2022 was the first time in history that stocks and bonds were both down double-digits in one year. This unprecedented type of fall hit us all hard, teaching us that even the most unexpected occurrences are more than possible in the financial field.
On a more positive note, bonds of all durations and types have rebounded to their historical norms year-to-date. It was a short time frame but a tough one for all bond investors.
2. Variables are… Variable
Sometimes, the picture looks so clear that we think we can hold onto the image forever. But at the end of the day, we’re looking at a forecast that can change as easily as the weather.
For example, take a look at the U.S. housing market in 2022. It started off the year booming with incredibly low post-pandemic interest rates. A 30-year fixed loan was holding steady at 3.1%. The sun was shining, and there wasn’t a cloud in the sky. Until there was…
By the end of the year, interest rates had already doubled to 7.1% before settling at an unsettling 6.4% by the year’s close. If you had asked any analyst at the start of the year if that would happen, it’s extremely doubtful that any of them would’ve answered with a confident “yes.”
So what did we learn? Variables are exactly that: variable. And we never know how they’re going to end up with certainty. Diversifying ourselves for unexpected impacts can always benefit us when dealing with anything that’s not a sure thing.
3. What Goes Up Can and Will Come Down
When certain stocks stay too high for too long, they’ll eventually be outpaced by their expectations. A clearcut example of this is how large technology stocks underperformed in 2022. Apple, Amazon, Microsoft, Facebook, and Google were untouchable in the 2010s — but nothing fails quite like success on Wall Street.
The giant drops of 2022 affected these companies in monumental ways. Rebalancing while you’re ahead is always a potentially solid strategy when it comes to the stock market because what goes up can come down at some point.
And this trend affects all stocks — not just the big winners. When you look at the stock market as a whole, there were large overall gains before things took a downturn. Last year’s 18% loss in the S&P 500 was preceded by 31%, 18%, and 28% gains three years prior. Still, that means the S&P 500 is still up over 60% from 2019, allowing for 13% returns per year.
So while what goes up will come down, gains can still counteract losses. The important thing is to choose strategic moves that set you up for success when your investments fall. That being said, what is down can still go up.
A financial advisor can help you devise a plan that will work for you, even in the face of inevitable losses like we experienced in 2022.
4. Risk = Returns or Wreckage
The pandemic boom of 2020 and early 2021 took specific assets and securities to a whole new level. Investors got in on the growth, eager to reap the benefits of these newfound goldmines. But investments that aren’t based on slow, steady growth are risky; they’re more speculative in nature than growth oriented. And while they enjoyed the returns for a while, their decisions led to wreckage in the long run.
In late 2021 and through 2022, the investors that stuck with these overweighted holdings lost what they had gained. Committing to risky investments for long periods of time rarely works to our benefit. And we were brutally reminded of that by watching assets that had boomed, sink so devastatingly badly last year.
What to Do in 2023
So how do we take these lessons and set ourselves up for success in 2023?
Buying & Selling Stocks/Bonds
As far as buying and selling stocks is concerned, you want to be a buyer when your overall allocation of stock is lower relative to your personal portfolio, and the same goes for bonds. A consistent timing strategy to review and rebalance, without emotional variables, is the preferred way to enact your buying and selling of any position.
The trick here is understanding your personal financial situation, as well as your own investing habits relative to your financial goals or objectives. By working with a wealth advisor or putting the work in yourself, you can identify what strategies are or would serve you best — and what aren’t. Then you can create your investment plan and financial plan for 2023 accordingly.
Expecting the Unexpected
By diversifying your portfolio and investing in a healthy assortment of risky and solid investments, you can protect yourself from unexpected occurrences like we saw in 2022. No matter how much we pay attention to the most recent forecast from the experts, we should be braced for impact at all times.
By having a comprehensive understanding of your financials, you can make more meaningful choices than if you simply rely on market moves. Not every decision will impact each investor in the same way. Being tactful and thoughtful with your decision making will serve you best in the long run. K Wealth Advisors is here to help you if you want a more thorough understanding of your investments and how to respond to the market in 2023.
Learning Our Lessons Well
Reflecting on 2022 will be painful for almost all of us, but it’s worth doing. If we look at where emotions and actions ran high, we’ll have a better understanding of who we are as investors. And when we analyze our behavior, we’re able to change patterns so that they’ll be more beneficial to us in the future.
2023 has anti-inflationary measures acting in full force. We’re probably looking at interest rates staying in a tight range, and expected stock valuations lowering — at least for the time being. But before we make any moves, we should evaluate what we learned last year.
Extremely unexpected, historical types of losses can happen. Variables will vary, stocks will eventually fall, and risks are, well…. risky! These may seem like lessons that we should’ve known already, but we were reminded of them the hard way last year, lest we forget.
The main takeaway from it all is that you have to proactively consider all of these things while planning your strategy for this year in order to set yourself up for success.