By Francis Bayes, WCI Columnist
For many reasons, 2022 was not kind to the wallet and the retirement prospects of average Americans. But this website is for healthcare professionals, other high-income professionals, and trainees who will most likely have (or currently have) above-national-average household incomes. The audience of this website (i.e., you) is not made up of average Americans. For you, 2022 might have been an opportunity or a relief because of your high savings rate or your large margin of safety.
Even if 2022 was a missed opportunity, we cannot change the past. Some of us were unlucky to start investing during the bubble. We can only control our financial plan at this moment. Is your financial plan prepared for another 2022? In fact, would your financial plan want 2022 rather than 2021?
This column is my hot take for 2023: whether one is an earner, a saver, a grower, or a preserver–as per Michael Kitces’ framework (Table 1)–those who follow the basic principles of the WCI community should wish that financial markets in 2023 are like they were in 2022, not 2021.
(To be clear, I do not want inflation to rise again, another war, or even the long-expected recession. I'm talking about the markets for stocks, bonds, housing, etc. For example, we should want another 10%-20% decline in the stock market. But I would rather have the markets of 2021 if it means that inflation goes back to 2% and the war in Ukraine ends.)
For Earners and Savers: You Can Keep Buying Stocks on Sale
I can claim to be a part of both “Earners” and “Savers” thanks to my wife, who is the primary breadwinner and works as a consultant. On the surface, my wife and I lost a lot of money in 2022. In January, we lump-sum contributed to our Roth IRAs and bought broad-market stock index funds (instead of “dollar-cost averaging”). Throughout the year, we kept buying Bitcoin and Ether, although their price fell too fast for us to allocate up to 2% of our portfolio (OK, I was responsible for her losing money).
Our portfolio is 98% stocks, but we would not have fared much better even if we owned bonds. Our YTD money-weighted return was about -9% (it helped to overweight small-cap value!) The YTD return of Vanguard Target 2055 Fund, which has 91% stocks and 9% bonds, was about -14%. Nonetheless, 2022 was a great year for us because we kept buying socks on sale.
Sorry, I meant stocks. Turns out Jason Zweig is right. It sounds better if I say socks on sale.
These stonks socks stocks (i.e., broad-market index funds) should be held for at least 20 years because stocks have not had a negative return over any 20-year period. As Cullen Roche argues, when we buy stocks in our retirement accounts, we should think that we are buying a bond that matures in 20 years—i.e., a loan that will not be repaid to you for 20 years. Just like we can sell bonds on the secondary market, we can sell our stocks in our retirement accounts. But we should understand that the penalty is excessive, because the moment we sell, we are forfeiting the historical guarantee of a positive return.
If you are 30 like I am, we should not worry about the stocks that we buy today until we are 50. Of course, anything can happen, and the stock market’s undefeated streak over 20-year periods might end at one point. If our stocks are worth less than expected after 20 years, our future selves might need to worry a little. But the likelihood of such a scenario is lower if the stocks are cheaper today (i.e., valuations are lower) because lower valuations are associated with greater future returns. This means that our future selves are less likely to worry about the stocks that we bought in 2022 than those in 2021. If 2023 is like 2022 and the stocks become even cheaper, the likelihood of our future worries will further decrease.
If the stock market declines in 2023, remember that we should worry less now because we will worry less in the future.
For Savers and Growers: You Can Be Greedy While Others Are Fearful
For most people, maintaining their asset allocation throughout another year of a bear market will not be easy. If the current uptrend (as of this writing) is another “bear market rally,” their belief in stocks will further erode. The interest rates in their high-yield savings account and bond funds will be too attractive. Sales pitches about alternative investments will grow louder. But if the prices of stocks do not increase at the rate of earnings growth (i.e., valuations decrease), savers and growers might want to consider increasing their allocation to stocks.
Is this sacrilegious? In his book Rational Expectations, Dr. William Bernstein suggests that strategic asset allocation might be appropriate during bubbles and market crashes. He defines strategic asset allocation as “small, infrequent changes in allocation opposite large changes in valuation.” One does not need to change their asset allocation every year, but 2022-2023 could be a historic opportunity. In December 2022, for example, professional investors were most overweight with bonds vs. stocks since March 2009. When others are too conservative, long-term savers should be more daring with their allocation to 20-year bond-like assets such as stocks. Discussion of strategic asset allocation is beyond the scope of this column, but if 2023 is more like 2022 than 2021, savers and growers can take their time to learn more about it and implement it.
For Growers and Preservers: You Can Better Match Your Liability
Dr. Anthony Ellis may disagree with me . . . but how much luckier can the Boomers get? They experienced a historic bull market (technically, we are still in a “secular bull market”) during their peak earning years. Depending on where they live, the value of their house likely soared as well. They could have ridden both waves and rectified any of their earlier mistakes.
I do not wish the inflation rate to increase again, because inflation can be devastating for “preservers.” However, preservers can now buy nominal Treasury bills and notes (not bonds!) at 4% and TIPS with positive real yields. One can buy enough Treasury bills, notes, and TIPS to survive any sequence-of-returns risk AND withdraw from their portfolio at a 4% real rate. Allan Roth demonstrates how one can create a 30-year TIPS ladder, and Big ERN declares the 4% withdrawal (guide, not rule!) to be back.
Although I do not plan on having Treasuries in my retirement portfolio for a while, I have a bit of skin in the game as my parents are near retirement. Their TreasuryDirect accounts do not own only I Bonds anymore. For their sake, I want the interest rates to continue to be higher than the rates in 2021.
Even if one wants to leave some money for their heirs (or charities), one’s strategy to match their short-term liability can be more versatile in 2022 than in 2021 because of the current interest rates. They can protect themselves from another year of unexpected inflation and still have income. They can buy three-month Treasury bills, which have higher rates than 10-year Treasury notes as of this writing; and depending on the change in interest rates, they can roll them over at higher rates or reinvest their principals in Treasuries with higher rates and longer duration.
For example, one might want to live on $100,000 in 2022 dollars (their desired liability), but in the worst-case scenario, they need only $60,000 (their true liability). They can buy a mix of TIPS and Treasuries with $100,000 in 2022 dollars. Five years later, they will want more than $100,000 in nominal value (i.e., in 2027 dollars) because of inflation. If the total return on their mix of TIPS and Treasuries is less than the difference between $100,000 in 2027 dollars and $100,000 in 2022 dollars, they might need to live on less or sell some stocks.
Either way, they would sacrifice less income or stocks by matching their liability at the end of 2022 rather than 2021. The likelihood that they would have less than $60,000 in 2022 dollars is lower as well. This is because current bond yields predict future returns. For one’s liabilities in the future, they should want the yields at the end of 2023 to be similar to the yields today.
‘Don’t Do Something, Just Stand There' . . . Unless You Don’t Have a Good Plan
Saint Jack Bogle is right, but only if your financial plan upholds his principles. In reality, such readers do not have to wish for 2023 to be like any year. Even 2019. You are prepared for any market because you will stick to your plan.
For those for whom standing still in 2022 was painful, give yourself a pass, especially if you are an earner or saver. The past three years were a unique period in the financial markets for many of us. To err is human! Myriad individuals have shared how they overcame their mistakes and achieved financial milestones in WCI blogs, forums, and podcasts. As the OG WCI says, “a physician income covers a multitude of mistakes.”
While others are still licking their wounds, you can create a good financial plan to take advantage of whatever happens next—not only in 2023 but also for your next phase in saving for financial independence.
Would you rather 2023 be like 2022, or do you want a repeat of 2021? If the bear market continues, will you buy stocks that are on sale? Can or should you be greedy if others are fearful? Comment below!
What is your asset allocation?
Are you adding more to crypto on the pullback?
98% stocks: TSM/S&P500 60%, SCV 15%, International TSM 20%, International SCV 5%
2% crypto: mostly btc and eth
I’m not sure if your question below was for me, but my parents are buying the T-Bills on TreasuryDirect. For the recent auction results: https://www.treasurydirect.gov/auctions/announcements-data-results/
I love the positive view here amidst so many negative headlines screaming at us about how terrible this investing year was.
I have stocked up on T-bills, T-notes, I-bonds, and TIPS. It is nice to finally get a safe return.
Are you buying the short term treasuries (1-6 months), also on treasury direct? I looked on treasury direct and it does not tell you the percent yield for each of these treasury notes and bills.
Paraphrasing William Bernstein, “If you’re young, you should get on your knees and beg for a painful, prolonged bear market. Your future self (in 10-20 years) will thank you for it”.
Also another quote, not sure who said it, “Most people make their riches in a bear market, they just don’t know it at the time”.
This bear market is nowhere near over. We haven’t even corrected to 2019 levels. At the beginning on 2019, the S&P was around 2500. If we have a major recession, which seems very likely, wouldn’t you expect to at least correct to that level or lower?
When you look at an S&P chart going back decades, it started going parabolic after the GFC in 2008, probably due to unrestrained easing of monetary policy. I expect a pullback to under 3000 at the very least, which is another >20%, or under 2500 even. Now is not (yet) the time to allocate to stocks. Rebalance to be heavy bonds/treasuries during 2023H1 and to stocks only after the last bull is carried out on a stretcher and the recession is officially called by everyone (probably sometime 2023H2).
If you’re right and the bear market is going to continue, I should keep buying stocks, no? I’m about to become a resident, and I know I won’t have the mental energy to try to time the market. I don’t think I’ll look back 20-30 years later and wish I waited for another year before I bought more stocks on January 3, 2023 (shameless plug: https://www.whitecoatinvestor.com/5-reasons-why-i-dont-regret-lump-sum-investing/).
Also, AFAIK the stock market tends to bottom before recessions.
Good points! I agree, the market tends to bottom right around the time the associated recession begins (either slightly before or slightly after) – and recessions are never officially declared until a few weeks or months after they start. So, you’re getting a good deal if you put money in stocks now, even if the S&P drops say another 20-33%, but then bounces back to a new high of 5000 in a few years – you made great returns.
I like to keep up on the markets on a daily basis, so I read most of the notes the analysts and traders put out every week (Goldman, Morgan Stanley, JPM, BofA). For the person who wants to actively manage their positions for greater returns – then I’d say bonds 1st half of 2023, stocks 2nd half. It’s extremely unlikely treasuries will decline in value for a 3rd straight year after declines in 2021 and 2022 (3 consecutive declines has never happened in US history), so treasuries are a pretty safe bet until stocks bottom.
Alternatively, if your crystal ball is just as cloudy as mine, you could just stay the course and rebalance your static asset allocation. No one can deny it works. I might have lost almost 10% in 2022, but my portfolio ended 17% larger than it began the year.
<10% down for 2022 is pretty impressive. Considering the gold standard for equities, S&P500, is down ~20% and government bonds are down ~16%.
I’m actually pretty happy about it to be honest.
What are you afraid of? Another 20-40 percent tank in TSM did not produce nearly as much stress to me as a sudden burst of pipe in my house or my swimming pool pump is not working or having a new baby (tons of hard work).
You do not need to do a damn thing if stock tanks. All you need is just wait out. That is so easy. I just do not know why people worry about it.
I can agree with that. My septic pump going out on a weekend was much more stressful. I actually don’t see stocks going down as stressful at all. I agree with Francis that it’s more exciting than anything because it’s a buying opportunity. Even more exciting if you speculate and buy SPX/SPY puts. All I’m saying is the tanking is probably not done, and if you wait a few more months, you’ll probably get an even better price.
The fun thing about probably is that if you put that word in everything you say you can never actually be wrong.
Haha, you got me there! I did put my money where my mouth is, but still no less likely to be wrong…
Not sure what crystal ball you’re looking at but there’s no guarantee of a recession. Most “experts” predict a mild recession and many have pulled back their recession fears after the recent jobs numbers. Just keep investing and don’t worry about predictions because you don’t know just like the rest of us.
Francis awesome article man preach on brother! i’m already 100% equities and will keep that asset allocation but I’m very tempted given this bear market to put in some of my emergency fund in but really have to hold off. Also saving up for a pool and tempted to put some of that money in as well. This bear market is awesome and I hope it continues. I not only hope 2023 to be worse (better?) in terms of the market going down, but I hope that continues for the next 19 years until five years before I have to retire! Wouldn’t that be a great stroke of luck!
To be successful in anything, one needs to have strong conviction. Just like Zuckerberg, even if the entire of the word feels VR is a wrong direction, he is still all in. This kind of person is much more likely to be successful. What are our convictions here? DON’T BET AGAIN AMERICA.
I wish it was another 2008 or 1929-1932 and lasted for many years! I have a feeling this one would not give me such a good luck.
‘If you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.’ Charlie Mungers
You should talk about selling covered calls on stocks you own. It’s a great way to boost your returns, especially in a bear market. If you sell calls that expire monthly with a strike price 5% out of the money, you could net ~1% each sale, or up to 12% annually – a very nice boost to returns.
Of course, there’s a chance your stocks will get called away and you will have to repurchase them, but in that case, you made a tidy 6% in a month! (5% stock appreciation plus 1% call premium). Obviously, tax implications apply, so if you don’t want capital gains, roll your covered calls before expiring if close to or above the strike price and it won’t get exercised.
Like any option, there is a downside, or in the case of covered calls, a limited upside. You keep all the downside but limit your upside in exchange for some income. Not sure taking equity risk to get income is the best move. Like other options, you’re just making a bet.
I am just doubling down. It is good market would take a longer stop. I wish 5 more years with 50 percent tank. That is much better than rise now.
Depends on if you’re 40 or 80.
I agree with general sentiment BTW I think this is a mistake: ” Discussion of strategic asset allocation is beyond the scope of this column (though WCI now has a book about it), but if 2023 is more like 2022 than 2021, savers and growers can take their time to learn more about it and implement it.” — pretty sure the book by Dr. Dahle is on asset protection, not asset allocation.
That’s correct. Not quite sure what he was referring to, although most of my books do talk about strategic asset allocation (i.e. a fixed asset allocation).
Yeah, the asset allocation/asset protection snafu was my fault. I edited that little aside into the column. I’ll take it out since it doesn’t make much sense.
Do I have to wait 45 days to get my earnings from a 4 week tbill from treasury direct? To me it would be stupid to do 4 weeks might as well just do 8 weeks then since you are out of the market for the 17 days. Thanks!