How did stocks perform in 2022?

 Overall, the S&P 500 fell by 19 percent in 2022.

It will probably be one of the 10 worst performing years for the stock index in at least 90 years.

But keep in mind that you probably started investing in stocks well before January 2022. Look at your returns over the long run before panicking.

Because a major stock index is down almost 20% now is a great time to invest for long term goals like retirement. We've all heard the advice "buy low, sell high." Now is a chance to buy when prices are low (relative to the recent past). 

Rather than trying to time the market, set up a regular automatic monthly deposit into your investment and retirement accounts. No one can consistently time the market by guessing exactly when to buy and sell.

This is what we mean when we say stocks are "risky." Actually it's more accurate to say that stock prices can be very volatile. That's why you don't want your emergency reserve funds, or money you expect to need in the next 3-5 years, held in stocks.

I bonds, U.S. Government inflation-adjusted bonds are a great place for your emergency savings, vehicle replacement fund, and other short to medium range goals. 

Just be glad you didn't buy Tesla stock at its peak in November 2021. The stock has lost 70% of its value since then. Another good reason to have a widely diversified investment portfolio. Don't put all your eggs, or even most of them, in one basket. 

The S&P 500 is up 19 percent since 2020!

 If you want to feel better about your investments, you’ll need to go back to the start of 2020. Stocks have rebounded considerably from the brutal bear market at the start of the pandemic.

Portfolio Diversification Still Works!

 When was the last time you examined your portfolio allocation? If it's been more than a year, the rising stock market may have up-ended your original asset allocation decision.

Never really decided on an asset allocation? Oh my! Now is the time. 

You don't have any control over the investment markets. You can't control the returns your portfolio earns... but you CAN control 

• How much you invest
• Your asset allocation (% allocated to stocks vs. bonds, domestic vs. international, etc. and
• How much you pay to invest
  

Amy C. Arnott, CFA explains why diversification is important. 

https://www.morningstar.com/articles/1031277/why-portfolio-diversification-still-works

What is diversification and why does it matter? 

There are many asset categories where an investor can park their money. Categories include stocks, bonds, cash, domestic and international securities, including commodities, corporate bonds, global bonds, high yield, REITs (real estate investment trusts), and Treasury Inflation-Protected Securities, among others.  

The correlation in the returns on these various assets vary from very high to very low.  

A diversified portfolio will reduce volatility (wide swings up and down) and limit losses during market downturns.  

You want a portfolio with assets that have LOW correlation with each other so that when domestic  stocks are doing poorly your international bonds might be doing well. 

"Correlations often tend to increase during periods of market stress, making portfolio diversification tough to find when investors need it most. This pattern held true in early 2020 as many major asset classes (except high-quality bonds and cash) moved in tandem during the coronavirus-driven market downturn. And over the past 20 years, correlations have edged up for several asset classes, including commodities, corporate bonds, global bonds, high yield, REITs, and Treasury Inflation-Protected Securities." 

"Diversification has often been called the only free lunch in investing. As Harry Markowitz first established in his landmark research in 1952, a portfolio’s risk level isn’t just the sum of its individual components but also depends on correlation, or how the holdings interact with each other. Correlation is a statistical measure that ranges from 1 to negative 1 and captures how two securities move in relation to each other (although it only captures the direction, not the magnitude, of those movements)."

"Combining asset classes with correlations below 1.0 reduces the portfolio’s overall risk profile. It's one of the few cases where the whole can be more than the sum of the parts; a well-constructed portfolio can have better risk-adjusted returns than its component parts alone."

"While diversification doesn't work with every asset class in every market, it's still an important tool for improving risk-adjusted returns over the long haul." 

 

A Simple Global Market Portfolio

A Simple Global Market Portfolio consists of "all stocks, bonds and other assets that are readily tradeable. This is the mix of investments that’s owned by all investors worldwide and reflects our collective judgment of what different securities are worth" writes Jonathan Clements in the Humble Dollar weekly email. Sign up at https://humbledollar.com

You can build this portfolio with "five exchange-traded index funds: 40% Vanguard Total World Stock ETF (symbol: VT), 21% Vanguard Total Bond Market ETF (BND), 33% Vanguard Total International Bond ETF (BNDX), 5% iShares Global REIT ETF (REET) and 1% Invesco DB Commodity Index Tracking Fund (DBC). The Vanguard Total World Stock ETF currently has 57% in U.S. stocks and 43% in international markets."

According to Clements, "it’s the ultimate “neutral” investment mix and hence should be our starting point in designing a portfolio." Stray from this basic mix for  the following reasons: "time horizon, job security and stomach for market turbulence."

Take the Investor Literacy Quiz

Female investors are less likely than their male counterparts to be confident about long-term opportunities in U.S. financial markets, about their own investment knowledge and about making investment decisions.
That’s according to “Mind The Gap: Women, Men and Investment Knowledge,” new research conducted by the Financial Industry Regulatory Authority’s Investor Education Foundation and George Washington University’s Global Financial Literacy Excellence Center.

The recent market volatility related to the global spread of the coronavirus (COVID-19) “sheds a spotlight on the importance of understanding investments and markets and why raising the investment knowledge of both men and women is essential,”
Take the 10 question quiz:
https://www.usfinancialcapability.org/quiz-literacy.php?utm_source=MM&utm_medium=email&utm_campaign=O_FoundationNewsRelease_031920_FINAL

Volatility: Financial markets are going crazy... what to do now

With the wild swings in financial markets, how concerned should you be about your investments?
First, remember that any money you expect to need within the next five years should never be invested in the stock market!
This is not like the 2008 financial crisis. It's been an 11 year bull market so too many investors have forgotten that stocks fall as well as rise.
If you panic and sell stocks now you are locking in "paper" losses. Remember buy low and sell high?
Now is a good time to stuff some money into your IRA, 401(k) or other retirement/long term goals accounts.
While the long term trend in the stock market is upward, short term ups and downs come unexpectedly and dramatically. If you choose to cash out and expect to wait until the investing news is good again... you've missed our on dramatic short term increases. You will have sold at a low point (locking in losses) and bought again at high prices, missing out on the benefits of long term stock investments.
So don't panic!
Now is a good time to reassess your tolerance for risk (volatility) and consider your time horizon. It is appropriate to invest in stocks for the long run and have shorter term (less than 5 year) money in more conservative investments or online savings accounts or CDs. Research confirms that investors' risk tolerance (as they perceive it or as shown by risk questionnaires) is high during bull markets and plunges during bear markets.
Are you diversified within and across asset categories? Low-cost index funds are the way to go, both for stocks and bonds and domestically and internationally. 
Review historical rates of return from various stock/bond allocations at:

http://www.vanguard.com/us/insights/saving-investing/model-portfolio-allocations

BUT don't expect such robust rates of return in the future, especially considering the ultra low returns on bond investments. 

Stocks are Risky; Pre-retirees and Retirees Must Consider your Time Horizon

The large drops in the stock market over past few days related to the coronavirus epidemic should be a wake up call to investors. Let's review some basic principles of investing.
Remember that your time horizon for retirement investing is the rest of your life and you may live to be 95 or 100!
Selling stocks when the market drops locks in permanent losses.
Stocks often rise and fall dramatically in very brief spurts in reaction to global events. Stock markets do NOT rise and fall in nice steady steps. Dramatic drops and increases are the norm. NO ONE can predict when these dramatic ups and downs will occur!
Stocks are investments for the long run. No money that you will need in the next five years should be invested in stocks. Funds needed in the short run should be set aside in safe places like savings, CDs, money market funds, I-bonds, T-bills, and corporate bonds.
The Bucket Approach to investing takes into consideration the time-related needs of investors. Money needed in the next 1-3 years (depending on your risk tolerance) should be in safe places that will not lose nominal value. Funds expected to be needed in 3-5 years can be invested conservatively in dividend paying stocks, high quality bonds, and other conservative investments.
Funds for the long run (over 5 years) should be invested for growth in the stock market.

This strategy is specific to the retirement decision for pre-retirees (within 5 years) and persons in retirement.

SO:
Investors in the accumulation phase and more than 5 years from retirement should review their asset allocation and rebalance yearly.
Investors nearing retirement should institute a bucket approach for their investments, even if they also have a pension.
Investors in retirement: the recent market plunge should be a wake-up call to carefully review your retirement income plan. DON'T PANIC! If you sell your stocks today your are locking in permanent losses. We went through this with the global financial meltdown in 2008-09. Have investors learned from that experience?

Benefits of a bucket approach:
Predictability and peace of mind.
You can tap assets and still generate portfolio growth. 
Considerations: 
You need to be disciplined about generating a set return sufficient to meet your retirement needs. 

Read all 3 articles below for slightly different perspectives on time horizons for the 3 buckets. 

See: How to Use the Bucket Approach to Make Your Retirement Savings Last by pete Woodring

https://www.kiplinger.com/article/retirement/T037-C032-S014-bucket-approach-make-your-retirement-savings-last.html
"The bucket approach is an effective way to mitigate sequence and longevity risk. The general idea is to set up three or more distribution “buckets,” with different asset classes and different time horizons for liquidation. Note that the time horizon for the 3 buckets will differ depending on the author. This article takes a very conservative approach by allocating stocks to time horizons of 10 years of more. 

The Pros and Cons of a Bucket Savings Strategy by Rebecca Lake https://money.usnews.com/investing/investing-101/articles/2017-11-10/the-pros-and-cons-of-a-bucket-savings-strategy Retirement investors should have "now," "soon" and "later" buckets.  "The bucket strategy can insulate your retirement portfolio from sequence risk and longevity risk. The former refers to the risk of earning lower or negative returns early on when withdrawing retirement assets. The latter simply means outliving your savings."

What Is The "Bucket" Approach Strategy To Retirement Income Planning? by Jamie Hopkins https://www.forbes.com/sites/jamiehopkins/2019/04/25/what-is-the-bucket-approach-strategy-to-retirement-income-planning/#7b09608539d6

 

Follow a Course to Smart Investing

The Financial Industry Regulatory Authority (FINRA) offers short online investing "courses" to help you make better decisions.

• Setting Goals
• Defining Terms
• Risk and Return 
• Rate of Return
• Diversification 
• Fees and Commissions

Check out: https://www.finra.org/investors/learn-to-invest/smart-investing-courses?utm_source=MM&utm_medium=email&utm_campaign=S%5FAI%5F021920%5FFINAL

And lots more education and information on the website: https://www.finra.org/investors#/

Wall Street Brokers missed the memo on Index Funds

"In recent years, investors have been flocking to low-cost index funds, driven by their long-term record of outperforming higher cost actively managed funds" writes Randall Smith in The Wall Street Journal (10/7/19). However, clients of Wall Street brokers have just 29% of assets in passive index funds according to a report by Cerulli Associates. The situation is even worse for clients of regional and independent firms with only 20-22% of assets invested in index funds. Who is getting rich? Certainly not the client who is paying high fees for funds that under perform their indexes. The benefits of index investing has been a major theme of this blog. Check out other posts that may convince you that your charming, persuasive broker may not have your best interests in mind.

Investing $5,000 a year results in $1.2 million in 40 years so start now!

Wait... $5,000 x 40  $200,000. How did you get $1.2 million? The extra $1million is due to compounding.
Writing for MarketWatch, Mitch Tuchman explains compound interest.

“Shark Tank” star Kevin O’Leary has some simple advice for anyone who finds investing scary: Just do it. Now.
“When you’re 21 years old, or 20 or 18 or 19 and you start putting aside 10% of what you make, you’ll [have] over $1 million by the time you’re 65,” O’Leary told CNBC.
“If no one else is going to worry about your retirement, I want you to worry about it.”

https://www.marketwatch.com/story/kevin-oleary-this-easy-math-trick-helps-you-crush-retirement-goals-2019-03-28?mod=cx_picks&cx_navSource=cx_picks&cx_tag=mw&cx_artPos=7#cxrecs_s

Of course, investing never provides a guaranteed annual return but the example should motivate you, whatever your age, to convert your daily impulse spending into future financial security....even if you have less than 40 years until your "financial freedom" goal.

Understanding Diversification with the Callan Periodic Table of Investment Returns

"The Periodic Table of Investment Returns depicts annual returns for 10 asset classes, ranked from best to worst performance for each calendar year."
https://www.callan.com/periodic-table/
Click on: Download the PDF.
I like this visual presentation of how asset categories fluctuate from yielding the highest returns one year to the lowest (or much lower) in subsequent years. The table is a great reminder of the benefits of diversification and NOT trying to time the market or pick the "best" investment.

Understand Key Concepts: Return and Rate of Return

When evaluating investment options or assessing the performance of your current investments, two concepts are key: return and rate of return. In this podcast, we explain both and how to use them to get the most out of your investments. Listen | 4 min. 45 sec. https://www.finra.org/investors/podcasts/key-concepts-return-and-rate-return?utm_source=MM&utm_medium=email&utm_campaign=Investor%5FNews%5F053117%5FFINAL

A visual representation of investment diversification

Check out the Squared Away blog for an effective visualization of investment diversification. I used the Callan Table in teaching diversification to my university students. It's a great way to understand why no one can predict future investment returns. http://squaredawayblog.bc.edu/squared-away/the-picture-of-investment-diversity/

Investment Return and Rate of Return: What's the difference?

Every investor wants to earn money on their investments. FINRA explains:
"Investment return is the money you make or lose on an investment. Ideally, your return will be positive: your initial investment or principal will remain intact, and you'll end up with more money than you invested."
"Total return is a measure of your profit or capital appreciation before taxes and commissions or fees."
Rate of return = Total return ÷ Investment amount.
The other factor you have to take into account in evaluating your return is the number of years you own the investment. There's a big difference in realizing a return of 16.67 percent on an investment you own for just one year, or what's called an annual return, and realizing the same return on an investment you own for five years. Your annualized return over a five-year period is only 3.13 percent." For more info:
http://www.finra.org/investors/highlights/key-concepts-return-and-rate-return?utm_source=MM&utm_medium=email&utm_campaign=Investor%5FNews%5F012617%5FFINAL

Investment Knowledge and Behavior: Ask Yourself These Questions

While the results of the recent FINRA Foundation study Investors in the United States 2016 are interesting, “what’s really valuable is to ask some blunt questions about your own investment knowledge and behavior.”  Read five key findings, and some questions you should ask yourself.

1. Ask Yourself: Do you know what you own? You can learn a lot by reading your account statements each month and taking time to learn how you can make and lose money with each investment.

2.  Investors use financial professionals—but most don’t check them out.

Ask yourself: “Have you looked up the background of your financial professional? It’s free and takes just a few minutes to do so using FINRA BrokerCheck. Over half (58 percent) of those who use an advisor say that professional designations or certifications are very important. If you count yourself among that group, learn more about the any designations your advisor holds using FINRA’s professional designations tool.”

3.  Knowledge of investment concepts is low. “Only 10 percent of the respondents who took a 10-question investor literacy quiz could answer eight or more questions correctly.”

“Ask yourself: How well do I know the basics of investing? You can start by reviewing the questions and correct answers to the quiz in the Investor Literacy section of the study.”

4. “Investors own individual stocks and mutual funds. Ask yourself: Do I understand the concept of diversification? Particularly, if you own only individual stocks, consider having a conversation with your financial professional about diversification. Prepare by reading FINRA’s Diversifying Your Portfolio.”

5. “Some investors understand advisor compensation—and some don’t. Ask yourself: Do I know how my financial professional is compensated? If you are not sure, then ask.

The investor survey is a component of the FINRA Investor Education Foundation’s National Financial Capability Study, one of the largest and most comprehensive financial capability studies in the country. Data for the survey were collected in July 2015.”

To receive the latest Investor Alerts and other important investor information sign up for Investor News. For more details & source of direct quotes above):

http://www.finra.org/investors/highlights/new-investor-study-ask-yourself-these-questions?utm_source=MM&utm_medium=email&utm_campaign=Investor%5FNews%5F122216%5FFINAL