If you want more money, make sure that 2023 will be like 2022

By Francis Bayes, WCI columnist

For many reasons, 2022 was not good for the pocketbook and retirement prospects of the average American. But this website is intended for healthcare professionals, other high-income professionals, and interns who will most likely have (or currently have) an above-national median household income. The audience of this website (that is, you) is not average Americans. For you, 2022 may have been an opportunity or a relief because of your high savings rate or your large margin of safety.

Even though 2022 was a missed opportunity, we cannot change the past. Some of us were unlucky enough to start investing during the bubble. We only have control over our financial plan at this point. Is your financial plan prepared for another 2022? Would your financial plan actually want 2022 instead of 2021?

This column is my hot take for 2023: whether one is an earner, a saver, a grower or a custodian per Michael Kitce’s frame (Table 1) Those who follow the fundamentals of the WCI community should wish that financial markets in 2023 are what they were in 2022, not 2021.

(To be clear, I don’t want inflation rising again, another war, or even the much-anticipated recession. I’m talking about the markets for stocks, bonds, housing, etc. For example, we’d like another 10%-20% decline in the stock market. But I prefer the markets of 2021 if it means 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 part of both Earners and Savers thanks to my wife who is the primary breadwinner and works as a consultant. On the face of it, my wife and I have lost a lot of money in 2022. In January, we added a lump sum to our Roth IRAs and bought broad market stock index funds (instead of average cost in dollars). Throughout the year, we continued to buy Bitcoin and Ether, although their price fell too quickly for us to allocate up to 2% of our portfolio (OK, I was responsible for her losing money).

Our portfolio is 98% equities, but even if we had bonds, we wouldn’t have done much better. Our money-weighted return YTD was about -9% (It helped to consider small-cap value!) The YTD return of Vanguard Target 2055 Fund, which is 91% stocks and 9% bonds, was about -14%. Nevertheless, 2022 was a good year for us as we continued to buy socks on sale.

Sorry, I meant stocks. Turns out Jason Zweig is right. It sounds better if I say socks on sale.

This one stank socks equities (i.e. broad market index funds) must be held for at least 20 years because equities have not had a negative return over every 20-year period. As Cullen Roche argues, if we buy stocks in our retirement accounts, we should think we’re buying a bond that is matures in 20 yearsthat is, a loan that will not be repaid to you for 20 years. Just as we can sell bonds in the secondary market, we can sell our stocks in our retirement accounts. But we must understand that the penalty is excessive, because the moment we sell, we lose the historical guarantee of a positive return.

If you’re 30 like me, we don’t have to worry about the stocks we buy today until we’re 50. Of course, anything can happen, and the unbeaten streak of 20 years in the stock markets may come to an end at some point. If our stocks are worth less than expected after 20 years, our future selves may have to worry a little. But the likelihood of such a scenario is lower if stocks are cheaper today (ie valuations are lower), because lower valuations are associated with higher future returns. This means that our future selves are less worried about the stocks we bought in 2022 than the ones we bought in 2021. If 2023 is like 2022 and the stocks get even cheaper, the likelihood of our future worries will decrease further.

If the stock market falls 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 afraid

It won’t be easy for most people to maintain their asset allocation for another year of a bear market. If the current uptrend (as of this writing) is another bear market rally, their faith in stocks will further decline. The interest on their high-yield savings accounts and bond funds is becoming too attractive. Sales pitches about alternative investments will get louder. But if stock prices don’t rise at the pace of earnings growth (ie valuations fall), savers and growers may want to consider increasing their allocation to stocks.

Is this sacrilege? In his book Rational expectations, suggests Dr. William Bernstein that strategic asset allocation may be appropriate during bubbles and market crashes. He defines strategic asset allocation as small, infrequent changes in allocation versus large changes in valuation. One does not have to change one’s asset allocation every year, but 2022-2023 could be a historic opportunity. In December 2022, for example professional investors were the most overweight with bonds vs. equities since March 2009. When others are too conservative, long-term savers should be more daring in their allocation to 20-year bond-like assets such as equities. Discussing strategic asset allocation is beyond the scope of this column (although WCI now has a book on it), but if 2023 looks more like 2022 than 2021, savers and growers can take the time to learn more about it and get it right. implement.

For growers and custodians: you can better coordinate your liability

Dr. Anthony Ellis may not agree 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 years. Depending on where they live, the value of their home has probably increased tremendously as well. They could have ridden both waves and righted their past mistakes.

I don’t want inflation to rise again because inflation can be devastating for savers. However, custodians 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 risk in order of return AND withdraw from their portfolio at a real rate of 4%. Allan Roth shows you how to create a 30-year TIPS ladderand Big ERN declares the inclusion of 4% (guide, not a rule!) to be back.

While I don’t plan on having Treasury bills in my retirement portfolio for a while, I have a little skin in the game as my parents are nearing retirement. Their TreasuryDirect accounts no longer hold only I-bonds. For them, I want interest rates to stay higher than rates in 2021.

Even if someone wants to leave some money for their heirs (or charities), their strategy to match their short-term liability in 2022 may be more versatile than in 2021 due to current interest rates. They can shield themselves from another year of unexpected inflation and still have income. They can buy three-month Treasury bills, which, as of this writing, have higher rates than 10-year Treasury bills; and depending on the change in interest rates, they can roll it over at higher rates or reinvest their principals in Treasuries with higher rates and longer maturities.

For example, someone might want to live on $100,000 in 2022 dollars (their desired liability), but in the worst case, they only need $60,000 (their actual liability). They can buy a mix of TIPS and Treasuries with $100,000 in 2022 dollars. Five years later, because of inflation, they will want more than $100,000 in par value (i.e., in 2027 dollars). 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 may have to live on less or sell some stocks.

Either way, they would sacrifice less income or equity by matching their liability at the end of 2022 instead of 2021. The likelihood that they would have less than $60,000 in 2022 is also less. This is because current bond yields predict future returns. For future liabilities, they should want revenues at the end of 2023 to be similar to today’s revenues.

Don’t do anything, just stand still. . . Unless you don’t have a good plan

Saint Jack Bogle is right, but only if your financial plan supports his principles. In reality, such readers need not wish for 2023 to be like every year. Even 2019. You are prepared for any market because you stick to your plan.

For those who found standing still in 2022 painful, give yourself a pass, especially if you are an earner or a saver. The past three years have been a unique period in the financial markets for many of us. To err is human! Countless individuals have shared how they overcame their mistakes and achieved financial milestones in WCI blogs, forumsand podcasts. As the OG WCI says, a doctor’s income covers a large number of errors.

While others are still licking their wounds, you can make a sound financial plan to take advantage of what happens next, not only in 2023, but also for your next phase in saving for financial independence.

Do you want 2023 to 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 when others are afraid? Leave your comment below!