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Quarterly Client Update Q4 2022

We hope you had a wonderful Christmas and that your 2023 is off to a happy and healthy start. In our quarterly email this time last year we took the opportunity that the new year presents to look back as well as to look toward the future. We’ll follow that pattern again this year.

Looking Back

After an extremely strong stock market in 2021, the S&P 500 index began the year just below 4,800.1 Inflation was not yet much of a concern and a majority of Wall Street firms were predicting this rally to continue due to strong corporate earnings, solid economic growth, and an improved supply chain. 

We are constantly beating the “ignore investment gurus” drum, but just for fun, we’ll list how some notable firms predicted 2022 year would end.2

BMO – 5,300

Wells Fargo – 5,100 - 5,300

Goldman Sachs – 5,100

Morgan Stanley was brave enough to break away from the herd and predict a bearish 4,400.

What actually happened was three straight quarters of stock and bond market declines that had the S&P 500 index below 3,600 near the end of Q3. Q4 saw the market rebound with the S&P 500 index climbing 7.56%, ending the year at 3,839 (an 18.11% decline).1,3 

This highlights that we should not make our investment decisions based upon what predictions are being made. We do not want to make light of the poor investment returns—we know it can be a source of stress and concern. Rather, our goal is that you become comfortable with the emotional ups and downs of investing so that when the markets have you feeling like you’re on Rock ‘n’ Roller Coaster, you’ll be as content as you are when riding the PeopleMover.*

The Future

When markets perform badly it is natural to question your investment philosophy. What impact would a recession have? How do stocks respond to rising interest rates? Should we shift to more defensive holdings?

Our advice continues to be that a portfolio built for your unique situation, continually monitored and rebalanced, is the best approach. We have often cited research to support this, but thus far none has illustrated the inevitability of market declines as well as the following.

Let’s assume we construct a portfolio using perfect foresight – every 5 years the portfolio would be rebalanced to the stocks that would be in the top 10% of performance for the upcoming 5-year period. If this was done from 1927 to 2016 using the S&P 500, there would be a total of 18 rebalances into the top stocks.  

The result? More money than you can imagine, but that is not surprising. The amazing part is that even this ‘perfect portfolio’ would have had 10 20%+ declines and even one 76% decline. Even with perfect foresight, volatility is the price of admission for higher returns and pain is part of the process to realizing those gains. 

As investors, we must understand this reality and not drive ourselves crazy trying to avoid the inevitable pain that comes with investing. 

So, even as we know we must hold on, here’s to a better 2023!

*For those not familiar with Disney World, Rock ‘n’ Roller Coaster has a maximum speed of 57 mph with 3 inversions while the PeopleMover has a maximum speed of 6.84 mph.

1Source: https://finance.yahoo.com/quote/%5EGSPC/history/

2Source: https://www.forbes.com/sites/sergeiklebnikov/2021/12/01/heres-what-wall-streets-biggest-banks-predict-for-stocks-in-2022-and-what-to-watch-for/?sh=1597d4676b31

3Source: LPL Research, Daily Performance Report as of 12/30/2022

4Source: The Better Letter, Bob Seawright, December 15, 2022

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. 

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.