Summary
Way back in March of 2020, when the S&P 500 index was down 26% year-to-date, I wrote that investing is hard. I then clarified what I meant:
"When I say 'investing is hard', what I really mean is that staying invested is hard."
That sentiment is still true today, especially when you consider how financial markets have performed so far this year. During the third quarter, the S&P 500 Index fell just over 5.0%, the Dow declined over 6.0%, and the Nasdaq dropped by nearly 4.0%. As of September 30th, these indices are down 23.6%, 19.4%, and 31.9%, respectively.
Ouch.
Even bonds, normally considered "safe" investments, are down. For example, the Bloomberg U.S. Aggregate Bond Index fell 4.75% in the third quarter...and is now down 14.6% for the year.
The only categories of investments that have worked this year are energy and commodities. Both are typically extremely volatile, so I don't recommend maintaining large positions in these categories.
Third 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 about 4.5% during the third quarter. Tack on the losses from the first and second quarters, and the average diversified U.S. stock fund is down nearly 25% as of September 30th.
International stocks performed worse than domestic stocks, with the average diversified international stock fund down over 10% during the third quarter. Adding the losses from the first and second quarters, the average international stock fund is down over 32% as of September 30th.
Investors pulled over $20 billion from both domestic and international categories.
Investors, perhaps realizing bonds weren't "safe", pulled nearly $34 billion out of bond funds during the third quarter. The average intermediate-term bond fund lost a little over 4.5% during the third quarter. When we add losses from the first and second quarters, the average intermediate-term bond fund is down 15% as of September 30th.
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 2022 through September 30th (the column labeled "YTD").
The category titled "Asset Alloc." refers to a 60% stock, 40% bond portfolio. Note how the classic 60/40 portfolio, long considered an ideal allocation for retirees, is down nearly 20% YTD. The financial media is on the case, writing articles with titles like, "Is the 60/40 Dead?" and "The 60/40 Portfolio is Officially Over". I disagree with those extreme takes, but my take, possibly titled "The 60/40 is Down This Year, But It's Fine - Especially If It's the Correct Allocation for Your Goals", won't generate clicks.
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.
As far as the chart goes, the only "winners" for 2022 are commodities and cash. Energy isn't broken out as a separate category.
Final Thoughts
I'll keep it simple and repeat some of the things I've said previously:
Stick to your financial plan. If you're a client, you already have a financial plan in place - one that takes downturns into consideration. If you're still concerned, or if something in your life has changed, you can always contact me. Not a client? Feel free to schedule an initial consultation if you want to talk about creating a financial plan.
Don't check your portfolio daily, weekly, or even monthly. Investing is a marathon, not a sprint.
Steer clear of financial "news" from sources like CNBC.
Have surplus cash? If so, take advantage of the decline in financial markets by investing while things are on sale.
Last Call for Series I Bonds at 9.62%
The current rate of 9.62% for Series I Bonds is available for purchases made by October 28, 2022. If you purchase by that date, you'll lock in the current rate for six months. If you buy after the 28th, you'll earn the new rate, which will be announced soon. I expect it to be high, but maybe not as high as 9.62%
If you're interested, here’s what you need to do:
Click on "Open an Account”.
Follow the instructions to open the account and link a bank account. I believe Treasury Direct sent an email with the account number and another to verify the new account.
Once the account has been opened, click on the “BuyDirect” tab near the top of the page.
Select Series I bonds and hit submit.
Input the amount you want to buy, up to $10K and hit submit. Notes:
The $10K limit is per Social Security number, so each spouse/significant other/child can buy $10K.
This also applies to trusts…if your trust has a different tax ID number than your own Social Security number.
The limit is $10K per Social Security number/tax ID number per calendar year. That means you can buy up to $10K in 2022 and again in 2023. Again, if you have the cash.
Important: The minimum holding period is 12 months.
The current rate of 9.62% will be adjusted at the end of October. If you buy now, the rate of 9.62% is guaranteed for 6 months.
Done! Enjoy earning 9.62%.
Aside from energy & commodities, this might be the best return investors see in 2022. The biggest hurdles are (a) having $10K+ in cash available and (b) the 12-month holding requirement. Otherwise, this is the safest, easiest way to invest right now.
