What I'll Remember 2022 For
I quickly put together a list of what I'll remember 2022 for. By many accounts, 2022 will go down as one of the worst years of investing due to the broadness of pain caused. Conservative investors felt it with interest rates and inflation. Not one felt it harder than those holding any speculative or high flying stocks and risk assets, as bankruptcy's and blowups are happening with frequency. The costs involved for home buyers are unimaginable today compared to 18 months ago. And the largest, most well-know technology stocks in the world had a decline in market cap that was staggering by any measure.
Above all else, a return to normal.
More than anything else, I've viewed 2022 as a transition year and return to normalcy. 2020-21 were THE aberration - no cost of capital, risk assets that only went up, 401(k)'s and home prices bursting at the seams, no one in the office, out of whack supply/demand etc. JPM just put out a note forecasting used car prices to decline by 10-20% in 2023. Pre-pandemic, this was just called a normal year of depreciation.
Respect the drawdowns.
While I didn't participate much in the asset bubble of 2020-21, I did buy several individual stock positions earlier this year - all companies that were at the time down between 30-50% from all-time highs. I thought I was bargain shopping; instead I was catching a falling knife in most of those cases. A 50% loss requires a 100% gain to recover. An 80% loss requires a 500% gain to recover, etc. You must have an awareness of this when holding any concentrated position.
There's value in constraints.
While I made some poor decisions on individual stocks, I've had a longstanding rule to keep 90% + of investable net worth in a broad basket of diversified ETF's and funds. These constraints allow for the failed exploration above without paralysis. Constraints looked foolish from mid-2020 through 2021, but many without guardrails have been wiped out in 2022.
The macro can overwhelm fundamentals.
A company could be great. Great business model, fortress balance sheet, etc. When the cost of capital goes up, inflation is raging, and a ground war starts in Europe, fundamentals sometimes don't matter a ton. Did Meta's business fundamentally get 75% worse in 2022? Probably not - it's more or less a victim of the macro environment.
Expectations (while helpful) are limiting.
When drawing up an Investment Policy Statement, we present clients with a report showing expectations around short-term portfolio drawdowns and upside. These are important conversations, as you cannot get to the long-term without surviving the short-term.
It isn't uncommon for a more conservative portfolio (call it 25% stocks / 75% bonds) to project a ~3-5% drawdown over a six month period. This is a three standard deviation event, occurring with a 95% probability.
Instead, those portfolios had a six month period that were off between 15-20%. And by definition, clients in conservative portfolios are allocated as such because they don't want (or need) to take on additional risk. It wasn't that interest rates went up - it was the speed in which they went up. We've never seen it before, but I suspect that's not the last time I'll say that as an investor moving forward. Expect the unexpected.
Headwinds can become tailwinds.
As described, the speed at which interest rates went up this year hammered bond prices in a short period of time. These higher rates have now began working their way into portfolio returns, providing income many investors haven't seen in years. Stock prices being reset lower is a necessary prerequisite to future returns being higher. The hard path today often makes the easy path tomorrow.
Work with great people
I get to work with amazing people every day (both colleagues & clients.) After this year, I feel that way more than ever, and am grateful for the work I do and the people I get to do it with. Despite the market environment, we've done good planning work with a lot of clients who are kind, appreciative and amazing partners. Good work that I couldn't do alone without support behind the scenes. I deeply appreciate it all.
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Sources: Bianco Research, JPM Research
The content in this article was prepared by the article’s author. Voya Financial Advisors, Inc. does not endorse its content, and the views expressed may not necessarily reflect those held by Voya Financial Advisors, Inc.
