Monthly Outlook: January 2023

It’s that time of year when we wish each other “Health & Prosperity” or something similar. I’ve always thought that health (both physical and mental) should be one’s primary focus. Without it, no amount of money is really going to matter. But I have learned something about prosperity over the past several decades and will share some time-honored secrets to achieving it. After a dismal bear market in 2022, where nearly every asset class did poorly, many investors could use some hope and a reminder that there is a good path forward.

First, a recap of 2022 for the record: S&P500 lost 18.2%, NASDAQ sunk 32.5%, International stocks dropped 15.5%, and even Bonds lost 13.1%. Cash was the only major asset class with a slight positive return. The typical diversified growth fund (i.e., Vanguard Growth Fund) lost 17.2% and many investors didn’t even do that well. We’re happy to report that all six of our iFolios models beat their comparable benchmarks in 2022 by a sizeable margin (see your year-end performance report). We did it by losing less and with about half of the volatility of the markets. While “We lost less!” isn’t a winning marketing slogan, it’s still something.

This time of year, pundits and analysts are making endless predictions and forecasts. Most of them will prove to be wrong. But optimism sells on Wall Street and so the tradition lives on. I’d rather share some secrets about prosperity that aren’t forecasts and can be used now and forever.

Secret #1 – Manage the Mix

Focus on markets or asset classes rather than individual stock picking. Research shows that the primary driver of returns is how much you invest in which markets. Asset allocation, in other words, explains over 90% of returns. Research also shows that very few professional investors and fund managers (with large research teams) beat their index benchmark. Investors would do better to focus on their allocation mix, and actively diversify among broad asset classes: US Growth, Small, INTL Value, Bonds, etc. Buy more of the asset classes that are trending higher and less of the ones that aren’t. It’s not as exciting as stock picking, but it works. Managers note: If you can’t resist the temptation to pick winning stocks, at least carve out a small portion of your total portfolio to do it. Then track your performance and be honest with yourself.

Secret #2 – Avoid the Big Loss

The key is to never lose big. It’s too hard to recover from a big loss. A 10% loss only takes an 11% gain to break even. But a 50% loss takes a 100% gain to break even. Use some kind of “line in the sand” or “sell-stop” to ensure you don’t sink to the bottom. You wouldn’t drive a car without brakes or climb a mountain without a rope. Don’t invest without sell-stops. Surprisingly, most investors and managers have no downside protection plan. Buy and hold, although used by most investors, is a very speculative approach with no risk management. Managers note: A simple approach would be to use a 200-day moving average as your line in the sand for any investment. Sell or trim your position if it dips below this trendline.

Secret #3 – It’s a Marathon

Steady wins without ever blowing up is the fastest and surest way to real prosperity. Compare your returns to appropriate market benchmarks that match the markets you’re investing in. Compare apples to apples. Don’t compare your balanced stock/bond portfolio to the all-tech NASDAQ index or to your brother-in-law’s claimed returns. And compare your returns to benchmark returns over the short, medium, and long term. You won’t beat the benchmark returns every day or every quarter, but over time, you should expect to inch ahead and with less risk. It takes time and discipline to get, and then stay, rich.

Starting 2023 Cautiously

Following the advice above, we are cautiously invested as we start 2023. We are under-weighted US stocks and we’re neutrally positioned INTL stocks. We’re holding only short- and medium-term bonds for now. We’re managing the mix based on the trends, have sell-stops in place to avoid the big loss, and are focusing on the long term. Health and prosperity – cheers!