As an advisor I usually love meeting with clients to review their plan and investment accounts. It is usually a time to reflect on what we have done so far as well as to plan for the future. This year however, I am a little less enthusiastic. One of the worst feelings as an advisor is informing your clients that their investments had negative returns over the past year. I suppose that it is somewhat silly of me to dread these conversations as those clients who’s accounts suffered the most in 2022 also have the most time to make up those unrealized losses. All the same, last year was a particularly bad year. Our clients felt it, we felt it, the whole world felt it!
While we all felt the pain of down markets, increasing inflation, and rising prices, was last year really as bad as it felt? It certainly seemed worse than anything I had ever experienced over the course of my short career but do the numbers really bear that out? The S&P 500 Index ended 2022 with a return of -19%. That sounds pretty bad so let’s put that in context with the top 10 worst years ever for the U.S. stock market (as measured by the S&P 500 Index):
As you can see, not only was 2022 a poor year for stock market performance, it was a historically bad year clocking in at #7 on the top 10 list. There is also a reason why I, and probably many others, don’t recall a year this poor. It has been 14 years since the last time the stock market performed worse than it did in 2022!
We have not seen a year even remotely this bad since the 2008 financial crisis. In fact, we are coming off of the longest bull market run in the history of the stock market! The S&P 500 averaged an annual return of 8.80% during that time frame even when taking last year into account. Additionally, the only other year during that run that ended with negative returns was 2018 at -4.36%.
The strength of the stock market, and the broader U.S. economy, has been extremely strong these last 14 years. Needless to say, we have been a bit spoiled and perhaps forgotten that the markets do go down from time to time! As you look at your year-end statements for 2022, try to keep this in mind.
All of this data provides a perfect example of one of my favorite sayings in finance, “when in doubt, zoom out.” Yes, last year was historically horrendous for the markets and our investments showed that. However, when we zoom out and look at the bigger picture our financial prospects look a lot less bleak. For example, if you had $100,000 at the beginning of 2008 and managed to hold on through last year’s downturn, your investment would be up nearly 270% (assuming your investments tracked the S&P 500 Index)! Imagine if you panicked and sold out of your investments at the bottom in 2008, 2018, or 2022? To use another term that I am quite fond of, avoid making the “Big Mistake” of buying high and selling low!
Despite having this knowledge of the markets, encountering years like 2022 can shake the confidence of even the most seasoned investor. That is why, in addition to gaining some perspective, having a financial plan in place is so very important for long term success. When you know what your goals are and how you are going to get there, it is much easier to see how a knee jerk reaction now will disrupt your plans many years down the line. In other words, a financial plan provides you with accountability and staves off the decisions based on emotions instead of facts! As we head into a, hopefully, better year, take some time to review your financial plan in light of the year that we just experienced. It may just give you the perspective necessary to be ready to face market volatility in the future!
Writing today’s blog post reminded me of a quote from a song I heard in high school, “perspective is a lovely hand to hold.” Is it cheesy? Yes, absolutely. But is it unapologetically my song of the week? Of course!
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 referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.