By Dr. James M. Dahle, WCI Founder
2022 has certainly been an exciting year to be an investor. Note that exciting does not necessarily mean good and, in fact, often means bad. Good investing is supposed to be boring, remember? Investing dorks like me find it fascinating and even exciting to watch what markets do through different economic conditions. I thought it would be fun to take a look at my own portfolio this year (as well as a few non-portfolio items that have had a big effect on my financial life) and consider which ones were the losers and which ones were the winners.
Note that I don't see having losers in my portfolio as some sort of failing. Since I use a static asset allocation composed of a wide variety of assets, I fully expect something in the portfolio to have terrible performance each year. In fact, I'm counting on it as an opportunity to buy more shares of that asset at a lower price. Diversification works, whether you want it to or not. Maintaining a static asset allocation naturally forces you to buy low all the time as you pour more money into assets that have not done as well recently.
One caveat before you read any further. I'm writing this post on October 26, 2022. If the markets do something crazy between now and whenever this post runs and I don't get a chance to update the numbers, you'll know why they seem a little off. Now, let's talk about the losers.
The Biggest Investment Losers of 2022
Plenty of losers this year, and they're not trivial. Lots of retirees have seen their nest eggs take a big hit.
Our first big loser of the year is the US stock market. As I write this, the Vanguard Total Stock Market Index Fund is showing a Year To Date (YTD) return of -19.71%. And that's up 7.6% from the low for the year. US stocks are officially in a bear market, and since they are a huge part of our portfolio (40% total), that has had a massive impact on our nest egg (20% * 40% = 8%). It's painful to multiply my portfolio x 8% and know that's how many dollars I've lost this year just in US stocks.
But wait! There's more. In case the US stock bear market wasn't painful enough for you, international stocks have also been in bear territory this year. Right now, the Vanguard Total International Stock Market Index Fund is down 23.54%, even more than US stocks! And yes, they're up 4% from their low for the year, too. There is a bit of a silver lining here, though. International stocks have actually performed better than US stocks this year; it's just that the dollar has strengthened so much that once you move the money back into dollars, your return is actually negative. For example, the dollar has strengthened as much as 19% this year against the euro and as much as 25% against the yen. Twenty percent of our portfolio is in international stocks, so this one also hurt a lot.
Publicly Traded REITs
Real estate makes up 20% of our portfolio, and publicly traded REITs make up 1/4 of that (5% of our portfolio). The Vanguard REIT Index Fund is down 28.38%. The public real estate markets react quickly to even a hint of rising interest rates. Combine that with an overall market downturn (publicly traded REITs have moderate correlation with other stocks), and it was pretty ugly.
Inflation might be the biggest loser of 2022. I am fully supportive of the Federal Reserve being very aggressive against inflation. While it was hard to know a priori, it's pretty clear in retrospect that the Fed lowered interest rates too much, kept them low too long, and otherwise pumped too much liquidity into the market. Inflation has turned out to be not nearly as transitory as we all had hoped. In March 2021, annualized inflation as measured by CPI-U had not been over 3% for over a decade. Three percent averages out to a monthly inflation rate of around 0.25% per month. Five of the 12 months in 2021 were more than twice that. Each of the first six months of 2022 was also more than twice that, peaking at a monthly inflation of over 1.3% in March and June. It has been a lot better this fall (including two negative months), but the overall effect of this high inflation in the last couple of years has been to make every dollar I own approximately 13% less valuable than it was at the end of 2020. Ouch.
If there is an asset class that hates inflation more than cold, hard cash, it's nominal bonds. The longer the maturity (and, more importantly, the duration) of the bond, the more it is affected by increasing interest rates. Vanguard has an ETF of very long duration bonds (ticker EDV) that is down 42.49% YTD. Luckily, we don't own that. But the majority of our nominal bonds are in the Vanguard Intermediate-Term Tax-Exempt (Muni) Bond Fund, and that's down 10.43% YTD. If there's something worse than a stock bear market, it's when bonds go down in value at the same time.
Perhaps the greatest investment disappointment of 2022 came to those of us who have been holding TIPS for years in order to protect ourselves from unexpectedly high inflation. Unexpectedly high inflation hit in 2022, and what did TIPS do? Well, the Vanguard Inflation-Protected Securities Fund is down 12.72% YTD. To be fair, if you adjust for the longer duration compared to the Intermediate-Term Treasuries Fund, it does have slightly better performance than the nominal bonds. However, if one had asked me how I thought TIPS would do vs. nominal treasuries in a year in which inflation spiked, I would have said that I expected them to do much better—not just a little better. However, it turns out that TIPS are quite sensitive to rising interest rates, especially rising real interest rates, and we have definitely seen those this year. In November 2021, five-year TIPS had a real yield of -1.9%. By the end of September 2022, that yield was up to a positive 2.02%, a swing of almost 4%. You just can't expect any bond to have a positive return when interest rates go up that much. This does make TIPS a dramatically better investment now than they were a year ago, but they were still a big loser for 2022.
Other 2022 Losers
Let's talk about some losers that didn't affect our financial life. Perhaps the biggest losers of 2022 are all the new-fangled investments. Bitcoin is down 70% from its peak a year ago. Many cryptoassets are down even more. The price of the average NFT dropped by 93% over the course of the summer. Pretty much a classic mania/bubble there. Gold, that supposed bastion of solid inflationary returns, is down 8% on the year. Silver, as usual, is twice as bad. If you liked these speculative investments at their prices a year ago, you should love them now. Variable-rate borrowers are also feeling pretty unlucky these days and are either rushing to pay off or refinance their debts. While I'm generally a fan of running interest rate risk if you can afford to do so, I hope all of those doing it really can.
The Biggest Investment Winners of 2022
Enough about the losers. Let's talk about the winners of 2022.
If there is anything that we have done in the last year that was smart, it was to buy $50,000 worth of I Bonds in late 2021 and early 2022. It's obviously not a huge chunk of our portfolio (it's not even a huge chunk of the 10% of our portfolio allocated to inflation-indexed bonds; most of that is in TIPS), but it was a huge winner! I Bonds never go down in value, even when rates go up. So, there was no loss of principal, and their yield was as high as 9.62% during the year. Almost 10% when stocks are in a bear market and backed by the government. Hard not to like that.
TSP G Fund
I've owned the TSP G Fund since 2006 when I went on active duty. In the last 16 years, it really hasn't had its day in the sun . . . until 2022. It is a fantastic holding in a rising interest rate environment. While I didn't contribute all that much to the TSP in the four years I was in the military, I have rolled a few retirement plans into it over the years. Gradually, as the rest of our portfolio grew, our entire TSP transitioned into the G Fund. The G Fund provides intermediate treasury yields with money market risk. Its principal never goes down, but it typically pays a higher yield than a money market fund. In a year when stocks and bonds are down sharply, anything that doesn't go down in value is a winner. The icing on the cake is that it is now yielding 4%.
Private Equity Real Estate
Long-term readers know that a large chunk (1/2 or 10% of the total portfolio) of our real estate portfolio is held in private equity real estate. Some is in syndications, but most of it is in private real estate funds for additional diversification and liquidity. These are doing just fine. For example, my little investment in the Peak Housing REIT that I made in November 2021 is up over 17% YTD. That looks awfully good when VNQ is down 28%. A larger investment in the DLP Housing Fund is also up 17% this year. The Origin Fund III is in the process of liquidating its assets, and it seems to be getting great prices on them. Other private funds have similar returns. Most of them lagged public REITs in 2021 (the DLP fund being a notable exception), but they are making up for it this year. One might argue that we're simply seeing a lag between public and private real estate since private real estate isn't marked to market daily. That's probably part of the story. The other part is that Mr. Market is a drunken sailor who rapidly cycles between greed (overvaluing stocks) and fear (undervaluing stocks), and public REITs go along for the ride. By the way, if you're interested in reading more about real estate and about some of the deals I invest in, sign up for our monthly newsletter.
Private Debt Real Estate
One of my favorite asset classes, despite it being the least tax-efficient, is real estate debt. These private funds have high returns, and they have consistent returns in all but a terrible real estate market (when a private debt fund becomes a private equity fund!) All of our funds are up 7%-8.5% this year, and there are still two months to go. I fully expect 9%-10% returns this year, just like last year. And the year before. Too bad it's only 1/4 of my real estate allocation (5% of our portfolio.)
Large and growth stocks have owned the stock market for years. Everyone loved Apple, Tesla, Facebook, and Netflix. Guess what? In 2022, that love affair turned sour. As of today, the Vanguard Growth Index Fund is down 30.37%. Meanwhile, the Vanguard Value Index Fund is down only 6.33% That's a 24% difference. Sure, value stocks are still down. But 24%. Come on. That's a win for those of us who have been holding on to a value tilt for the last 15+ years. Too bad a tilt toward small stocks didn't pay off in the same way this year. US small caps are doing a little better than US large caps, but international small caps are doing a little worse than international large caps.
One of the biggest stories of 2022 is just how much the dollar has strengthened, especially against the British pound sterling. As mentioned earlier, this severely retarded our international stock returns, at least when denominated in dollars. However, I had several opportunities this year to spend non-US currencies. We have spent or will spend all of the following currencies this year:
- Canadian dollars
- Costa Rican colon
- Honduran lempiras
- Croatian kunas
- Bosnian and Herzogovinan convertible marks
- Jamaican dollar
- Colombian peso
The strengthened dollar sure made our trips a lot cheaper. Eight days in the Balkans staying in the best hotels, eating in great restaurants, adventuring, and overtipping the tour guides all for something like $2,600 a person. We've spent twice that on other trips to Europe in the past.
Having an Income
2022 was a great year to still be working. Being able to buy assets at a discount (bonds 10%-15% off, stocks 25% off, REITs 30% off!) is a huge benefit. Just like the assets I bought in 2008-2009, these will end up providing some of the highest returns we will ever get from our investments. Just keep buying!
2020 saw emergency department volumes drop by 40% or more as people stayed home with their strokes and heart attacks out of fear of getting COVID. It was even worse for many specialists, as “elective” procedures were canceled or delayed. I don't know about you, but things have really rebounded around here, and we're seeing the highest volumes I've ever had at this job. Consequently, we're getting the highest hourly rates we've earned. We're working hard but being rewarded for it. Earned income tends to keep up with inflation in the long run.
The year isn't over yet, but thanks to a lot of hard work from the WCI staff and community, we're on pace to see both top-line and bottom-line growth in the business again this year.
No, we're not old enough to receive Social Security, but our eventual benefits were adjusted upward with inflation this year. Delaying your Social Security is an awful lot like investing in an inflation-indexed annuity. Maybe not a win on an after-inflation basis, but it's at least a tie and that's good enough this year.
Other 2022 Winners
There were other winners this year worth talking about, even if they don't apply to our financial life. Low fixed-rate debt holders are now paying down their debts with less valuable dollars. Federal student loan holders are particularly big winners this year: they didn't have to make any payments, and their interest rate was at 0% all year (they could even have $10,000-$20,000 wiped off the books). Energy stock investors were up big this year—the Vanguard Energy ETF is up almost 55% YTD. Led by oil, commodities were big winners this year, with the ETF GSG up 29%. Savers won one and lost one. Sure, their dollars were devalued, but they're also seeing their best yields since before the global financial crisis. Finally, Sam's Club and Costco lunchers can still get a hot dog and a drink for $1.50.
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What do you think? What are the big winners and losers in your financial life this year? What would you have done differently in 2022 if you knew what was coming? Comment below!