Summary
Investors endured a lot over the last three years: A global pandemic (which is still hanging around), supply chain problems (also still here), rising inflation (probably still rising), and Elon Musk's shenanigans (no sign of stopping). Despite all of those things, global financial markets were surprisingly resilient, delivering three straight years of big gains. In case you need a refresher, the S&P 500 Index, a reasonable proxy for "The Market", had the following returns over the past three years:
2019: 31.49%
2020: 18.40%
2021: 28.71%
2022 got off to a decent start. People were vaccinated, shutdowns were easing, and people were starting to travel again. Sure, the problems listed above were still with us, and the Fed was threatening to raise interest rates in order to combat inflation, but things were looking up. Unfortunately, I don't think many people had "Russia invades Ukraine" on their bingo cards.
If there's one thing investors hate, it's uncertainty. And the invasion injected plenty of uncertainty into people's everyday lives as supply chains were strained further, global payment systems were disrupted, and energy prices skyrocketed. Tack on rate hikes from the Fed and the result was a decline in stocks and bonds during the first quarter, with the Dow Jones Industrial Average down 4.6% and the S&P 500 down 4.9%.
No one likes seeing their investments decrease in value. But it happens. I believe this time might feel worse because we've had such an incredible run over the past three years. Hang in there. Everything will be fine.
First Quarter 2022 Numbers
The average diversified U.S. stock fund, which is a better measure of how we invest than the S&P 500 or the Dow, fell just over 6% during the first quarter.
International stocks also declined, with the average diversified international stock fund down a little over 8% during the first quarter.
Despite the declines in both domestic and international stocks, investors plowed money into both categories, about $70 billion and $31 billion, respectively.
Investors, perhaps realizing bonds weren't a safe haven, pulled nearly $89 billion out of bond funds during the first quarter. The average intermediate-term bond fund lost almost 6.0% during the first quarter.
Returns By Broad Category
Can't read this? Here's a link to a PDF of this chart.
The chart above provides a high-level view of how the broad asset categories have fared annually from 2007 - 2021 and the first quarter of 2022 (the column labeled "YTD"). The category titled "Asset Alloc." refers to a 60% stock/40% bond portfolio.
I love this chart and always look forward to seeing the updated version. Two takeaways:
Notice any patterns? If you answered "yes", we need to talk because your brain operates on a different level than mine. It's impossible to consistently predict which categories will perform best from year-to-year or month-to-month.
This chart is Exhibit A for why it's prudent to build diversified portfolios. Sadly, diversification means you're always having to say you're sorry because it's rare for every category to produce positive returns.
Series I Bonds
Over the past few weeks I've received many inquires about Series I Bonds. Why? Because the current interest rate, through April, is 7.12%. That's a fairly amazing rate for what is nearly a risk-free investment.
Should you buy I Bonds? Like many things in finance the answer is "it depends".
I Bonds might be a good investment for you if:
You have set aside enough cash to cover at least 3-6 months (or more!) of living expenses.
You can afford to hold the I Bonds for 12 months, which is the minimum holding period.
Three more things:
The maximum amount you can purchase is $10,000/year per person. That means a couple can purchase up to $20,000/year.
The actual details about how much you can purchase are a bit complicated. I don't want to confuse the situation by adding those details here, so please do not send me an email that starts off with something like "Well, actually...." because I'll roll my eyes and get angry. And you wouldn't like me when I'm angry.
I'm happy to help you determine if I Bonds are right for you. Contact me if you want to chat.
