Year End Review: 2022 | AWM Insights #138
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Episode Summary
2022 has been a rough year for investors and brought in a long list of exceptional events. Meltdowns in SPAC’s and Crypto, an energy crunch, rising interest rates, and an unprecedented war overseas lead to market reactions and financial turbulence. Most Equity and Bond indices finished the year in the red. The S&P 500 also snapped a 3-year winning streak of double-digit annual returns.
Losses are never ideal, but it is important to reference history and understand how market performance affects your portfolio and overall financial well-being.
The S&P 500 has a “record” of 71-26. Over the past 97 calendar years, 71 have been years with positive returns. The average return during a positive year was 21% while the average return during a negative year was -13%.
The skew and magnitude of returns are in the favor of the investor and working with a team that properly positions your portfolio to capture the upside while also protecting your priorities is essential to both participate in the market and achieve your goals.
Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join.
Episode Highlights:
0:00 Intro
1:01 Year-End Review
1:29 How accurate were the predictions for 2022 returns from the “Experts”
2:13 Emotional responses to volatile markets
2:38 Notable events in 2022
4:43 Has a recession been declared
5:44 How are we positioning our portfolios for the future given the turbulence
7:06 Controlling what we can control, and how we used volatility to our advantage with Tax Loss Harvesting
8:14 Interest Rates movements and their impacts on your financial structure
11:08 How interest rates affect Equity markets
11:53 Why paychecks during downturns are a huge positive
12:25 Markets pivoting on new information and fed stance
13:25 Key Takeaway 1: Don’t let short-term news derail your long-term plan
14:03 Key Takeaway 2: Is your fixed income allocation working in the right way for you?
14:35 Key Takeaway 3: Global Diversification
15:01 Key Takeaway 4: Markets are forward-looking, and they consider investor sentiment
15:40 Predictions for 2023
16:55 Wrap Up
+ Read the Transcript
Brandon Averill (00:03): All right, everyone. Well, we made it. We're at the end of 2022. If you've been paying attention at all, that's actually a feat. Been quite an interesting year. One thing we implemented this year was a new number to shoot us some texts and get some info. Would love to hear just what everybody thinks. How it's gone this year, give us your suggestions. We're going to be drinking lots of champagne, so we'll be able to take it. But that phone number again, (602) 704-5574. We'd love to hear from you.
(00:35): But in this episode here, Justin, let's do a little year-end wrap. See if we can package everything that happened in 2022 into a nice tight bow here.
Justin Dyer (00:47): Top 20 list or something like that?
Brandon Averill (00:48): Yeah, sure. Why not? Everybody started off the year, I was doing some research for this, I thought that was interesting. And looking at some of the analysts, saw the big wire houses and their predictions for the year, it was pretty striking. Even the great Goldman Sachs had the S&P at 5,100, so they missed just a little bit.
Justin Dyer (01:06): Just a little.
Brandon Averill (01:07): But I think there were 20 big Wall Street firms with their predictions at the beginning of the year, and not a single one of them even came close.
Justin Dyer (01:16): One of these days I'm going to build a bot that captures all those predictions, and actually publicizes them, and then measures them against actual results. That will be my contribution to society one day.
Brandon Averill (01:28): There you go. I love it. I love it. Well, we're kind of saying that tongue-in-cheek, obviously stock market-wise, an emotional year. I think a lot of people say difficult year, I would rather put it as emotional, because I think this was a year that if you're a long-term investor, these are the years that ultimately pay off in some ways, and it's why you get rewarded as an investor.
(01:51): But why don't you run through some of the things that stuck out for you this year? What moved markets, what were some of the big headlines, all that type of stuff?
Justin Dyer (02:02): From a market perspective, there were arguably a lot of things that were big market movers. We had the midterm elections, and I'm not going to go in actual sequential order here, but just rattling them off.
(02:16): Midterm elections typically, there's always some emotions, to your point, leading up to that. I think we saw some of that.
(02:24): All sorts of interesting things around crypto, big implosion towards the end of the year here. Rough market for crypto specifically as well.
(02:34): Inflation was a big topic. Alongside inflation, we had interest rates rising at one of the fastest paces on record. Let's not forget the unfortunate still ongoing war in Ukraine really started off pretty early in the year.
(02:51): Then there was some more of the interesting, but potentially less relevant from a market standpoint, news items. Elon buying Twitter, that certainly caught plenty of headlines. And as we know, Elon Musk loves to be in the headlines, so maybe that was part of his calculus, to drag that out as long as possible.
(03:14): On the golf side, on the sports side, pretty cool year. Interesting to see how some of what's happening within the sports world from a business standpoint will unfold LIV and the PGA still going at each other's throats to an extent.
(03:30): And the big question, which is still pretty much unanswered, I think a lot of what I'm already talking about has somewhat been answered. We don't know for sure if inflation is cooling. It seems like it is, but the big question around, are we in a recession or not, or did we have a recession last year? The typical definition of two quarters of negative GDP, we had that I think technically last year, but the final arbiter, the National Bureau of Economic Research, has not officially said a recession.
(04:00): Lots of items and lots of emotion as a result of those items. And obviously that all resulted into a more difficult year, like you said, in the markets.
Brandon Averill (04:12): I think it's an interesting thing, the recession piece, because it's a question we talk about a lot with clients. And I'm sure clients that are listening, it's top of mind for you guys, but you've mentioned that the MBER has not declared a recession. And I know we've talked about this on previous episodes, but when it comes to a recession specifically, how much are you worried about that in 2023, when you think about our client portfolios? And maybe explain a little bit to people listening as we're working through client portfolios, as we look at the end of the year, we look at the year ahead. Are we making adjustments? What the heck are we doing? Are we just sitting on our hands? How does a potential recession or the impact of recession play out on portfolios?
Justin Dyer (05:05): With respect to portfolios, very little. We talked about it, I think, a couple episodes back, couple months back. Markets and portfolios as a result of that are forward-looking. A recession, especially once we get an official call that we were in a recession, that's backward-looking. And so my definition, you're reacting to something that's already happened in the past. When and if we get an official call on that, it will change our approach very, very little.
(05:38): Maybe the question to answer myself too is, how are we predicting whether or not there's a recession in 2023? I think, and I hope most of our clients listening to this and most of the listeners who are listening to this, know that that's just not a game we play. It's a very, very, very, very difficult game to play. It's not proven as one to add value over the long-term, and so we just don't do it.
(06:00): It's interesting to discuss it and talk about the economy, talk about the potential impacts on the market, but then actually executing on that based on the weak statistics or the weak evidence is just not something we're willing to do. Because at the end of the day, that actually puts you, our clients, portfolios at risk. If we are being kind of, let's use the term emotional again, in our portfolio management techniques, that's deviating away from evidence, in our opinion, so we just don't play that game.
(06:33): But what we do is, we rely on that evidence, we control what we can control. We talk about tax loss harvesting. This year was a phenomenal year for tax loss harvesting, because it wasn't a great year in the markets. But it gave us opportunities to actually add value and create value in times that, from a headline perspective, it wasn't a great year necessarily, but there still are ways in which we can add value through tax loss harvesting. So that's selling an asset that has depreciated, and buying something very similar.
(07:04): So exposure's maintained, but you get to take advantage of that from a tax perspective. It doesn't necessarily show up in your rate of return, but your one net worth, your one tax rate, really, really benefits from simple things like that. And those are the items and areas we focus on, and we'll continue to focus on in 2023. Hopefully we don't have as many opportunities next year, but we just don't know that.
Brandon Averill (07:25): Yeah, we never know when they're going to come, but having our finger on the pulse. I think so many people only focus on that at the end of the year, and it's an unfortunate part of our industry, but if you're focused on it throughout the entire year, you can really create value for clients in that way.
(07:42): The other thing you mentioned was interest rates. This has been such a big issue, I think, certainly in the financial world, how it does impact investments. And depending on how you treat certain investments, specifically bonds, it might have really upended your world. Thankfully for our clients, the way that we use bond allocations in a very targeted way to meet priorities has much less of an effect, which is great.
(08:10): But we went through probably the greatest interest rate increasing cycle, certainly that I can recall. I'd seen the stat that nearly every central bank hiked rates over two and a half percent, which is pretty remarkable over the course of a year. And then the consumer, at the end of the day, clients also felt this in their mortgage rates. If anybody bought a house in the last six months or so, they certainly saw higher rates on their mortgages, which impact payments, et cetera. We're starting to see the fallout in the housing market.
(08:49): So maybe just hit on really quick, interest rates. What kind of impact does that have on the overall financial structure for clients? And then when we back it all the way down to the bond allocation, how we treat that?
Justin Dyer (09:02): Yeah, how it impacts the overall financial structure of clients. A rising interest rate actually doesn't impact the existing financial structure. I'm talking about if we've already had a client allocated, it doesn't impact it all that much, because you alluded to how we build portfolios. In the short-term, the way we build portfolios is to take short-term priority, short-term goals, short-term spending needs, however you want to think about it, whichever way makes the most sense to you, and then match those with a bond or a fixed income instrument that lines up with that from a maturity or length of time standpoint really, really well.
(09:45): So let's say you need to make a tax point payment in April of next year, guess what? We're going to buy a treasury or a municipal bond that matures basically when you need to make that payment. There's going to be some movement between now and April, when you need to make that payment, or October, maybe you're making payment then, but guess what? When that bond matures, you're going to get your par value. And unless there's a huge default in the US government or state government, you know what you're going to get.
(10:12): And so that's what you're alluding to when you said the way we build portfolios, the price movement of a bond, doesn't matter as much. So that's how to think about the impact of interest rates on existing positions. There might be some price movement, but the way in which we match assets and liabilities really, really, I don't want to say eliminates, but minimizes substantially, risk to meeting your priorities.
(10:39): From a more long-term standpoint, this year interest rates are arguably one of the main reasons why the markets are down. There's other reasons, the war in Ukraine. There's probably a laundry list that we could go down, but interest rates and the rising of them were the main reason. And the simple way of thinking about it is that company's cost of capital has gone up. Over the long-term, that doesn't change our expectation of equity rates of return. And so again, like I alluded to with the recession conversation, we don't really change too much with respect to how we're managing equity portfolios, but it does give us opportunities to take advantage. Tax loss harvesting, maybe we do some opportunistic rebalancing within equities.
(11:24): The great benefit is if you are in a position to contribute in a market environment like this, guess what? You're buying at lower prices than they were 12 months ago or 18 months ago. And that typically is a great thing for, I think you mentioned it at the outset, long-term investors, long-term wealth creation. And there's always a great time to be an investor, but now is most definitely, because of what interest rates have done to equities. It's not guaranteed that the Fed continuing to raise rates, which they are likely to do, will continue to put downward pressure on equities.
(12:00): We've been trading in this range recently, where the market's going sideways. We're not ending the year with a bang, for sure, and a bang in the other direction. But at some point in time, the market, like I said, is forward-looking. And you've seen that in certain action, when the Fed has said, "Okay, wait, we're taking our foot off the gas a little bit," and the market rallies. But then the next day something comes out and they're like, "Oh, well, wait a second," maybe the Fed is going to continue to increase interest rates more and for longer, et cetera. We're in this period where there's continued uncertainty. It's not just outright increases in rates going forward, but who wins out? We don't know. It matters really until it doesn't almost, in a sense.
Brandon Averill (12:42): Right. No, I think that's fantastic, and almost brings us, as we start to think about some of the key takeaways from the year, quite frankly, is one of those is, don't really let yourself get caught up in that crisis of the day.
Justin Dyer (12:57): Yeah. I love that.
Brandon Averill (12:59): Don't get derailed by a war in Ukraine. Horrible for the world, et cetera, but when you start to think about your individual portfolio, it really comes back to the financial structure. And unfortunately we've had lots of crises like this over the years, and if you're a long-term investor with the right financial structure, you're going to work yourself through these types of events.
Justin Dyer (13:26): Totally.
Brandon Averill (13:26): Certainly taking a look at your bond allocations is another key takeaway. Are you using bonds in the way that they should be used? We feel very strongly about this, and for clients just really understanding that the way that we utilize bonds and these future interest rate moves, we really, really try to immunize you against this. So the price movement of those bonds and the movement of interest rates don't affect too much the ability for you to accomplish your priorities. So that's another big part of it.
(14:01): Global diversification, I think this is just ultimately a vote back for financial structure. We've hit it over. I think we should go back and see, I bet we've hit on financial structure in every episode.
Justin Dyer (14:12): Most commonly used term on the podcast.
Brandon Averill (14:13): But at the end of the day, there's a lot that's happening. There are a lot of headlines out there. We continue to see COVID stuff in China and [inaudible 00:14:23], we've mentioned the war in Ukraine, we've got potentially more rising interest rates, et cetera. Really spreading your money out over the world, we know statistically, is the best way to go about investing.
(14:36): And then the last one, I think a good thing to maybe get towards the end on, is that markets do incorporate investor expectations. They are very efficient, these markets, and they're a voting machine for how people think about the future. And so whether the next interest rate expectation is there, those things get priced in super well. And so it's just really hard to predict those markets.
(15:04): So with that, I'm going to ask you, 2023. I know we can't predict them, but what do you predicting?
Justin Dyer (15:11): Oh, man. On which front?
Brandon Averill (15:14): No.
Justin Dyer (15:14): Were the market will be?
Brandon Averill (15:15): Sure. Why not? Take your pick. I'll let you [inaudible 00:15:19].
Justin Dyer (15:18): Here's a fun fact. Way back when I was just getting into the industry, I was going through one of the courses for all the licenses we had to do, and the instructor actually had us predict the Dow at the end of the class. And I got it to the point.
Brandon Averill (15:32): Nice.
Justin Dyer (15:32): So hey, maybe I missed my calling, and I should be a forecaster and look into my crystal ball, but I won't play that game.
Brandon Averill (15:39): You won't play that game. Well tongue-in-cheek, but I will leave us with this. We were taking a look at some of the data again, and looking at, after down years in the S&P 500, it was almost split even-steven, 50/50. In the years that it was down, the return in the following year was about 9.8% annualized. And in years that the market was up, the following year, it was about nine. I think it was like 9.6%. So pretty much...
Justin Dyer (16:18): Past performance doesn't care.
Brandon Averill (16:19): Yeah. Past performance doesn't really care what happened in the year before future performance. So anyways, we'll wrap up there. Hopefully everybody's enjoyed the updates throughout the year. Hopefully you learned a little bit more about how we approach your financial structure, how we invest your money, for those clients listening. We appreciate you guys, we appreciate your attention in dialing into this, hopefully in the car, on the bike, wherever you're at. And we'd love to hear from you, as you know. So (602) 704-5574. And until next time, until next year, own your wealth, make an impact, and always be a pro.