In this blog we have written extensively about the returns in the market in 2022. As a quick refresher, but without belaboring the point, the S&P was down about -19% which is the 7th worst year on record since 1957 when the index was expanded to include 500 companies. Many investors and advisors (ourselves included) perceived that 2022 may be a bad year for stocks and thus moved assets to bonds which normally have an inverse relationship with stocks. Unfortunately, both stocks and bonds were down double digits in 2022, an anomaly that hasn’t occurred since 1969! Throw in high amounts of inflation and rising interest rates and there was no place to escape the carnage.
All of this said, 2023 has been a much better year. As of this writing, the S&P 500 is up 16.51% year to date. While this has been a welcome improvement, many are left wondering why it seems like their investment accounts are still so far in the red. The answer to this question is simple arithmetic. It is a common misconception that if your investment portfolio is down, 10% for example, then a corresponding increase of 10% will bring your account back to zero. However, this is simply not the case! Consider an investment portfolio worth $100,000 that suffers a -10% loss for the year. The portfolio would now be worth $90,000. If in the following year the market returns a gain of 10% the individual’s portfolio will end the year at $99,000 ($90,000 x 1.1). In order to get back to the original investment of $100,000, the investor would need a return of just over 11%.
In 2022, the markets were down quite a bit more on average than 10%. So, what will it take for the average investor to get their investment portfolio back in the black? Using the same example, if an investor with $100,000 saw a loss of -19% in 2022, their ending value would have been $81,000. In order to regain that loss in 2023 the portfolio would need to have gain of about 23.5%. That is about 7% higher than what S&P 500 returns have been this year! With only a month and half remaining in the year it seems very unlikely that the market will hit that milestone by year end.
It takes time for investments to recover losses and this is probably the best recent example that we have of this. Obviously, it can be distressing to see your investments take a hit like they did last year. It is really difficult to wait it out and it can be tempting to make a change to your investments. I often refer to this a making “The Big Mistake” i.e., buying high and selling low! It is only natural when your account value is plummeting to have the reaction of, “don’t just stand there do something!” However, we at Provisio (or Todd more specifically) are quite fond of the phrase, “don’t just do something stand there!” The idea of course, is that it is ill advised to make knee-jerk, emotional decisions, especially with our investments. It is often far better to wait until the smoke has cleared but making big moves in your investment portfolio. In the case of this year and last, the dust is still settling and patience is required in order to avoid making a big mistake!
In summary, the financial landscape in 2022 was characterized by significant challenges, with both stocks and bonds experiencing rare double-digit declines, compounded by inflation and rising interest rates. The subsequent year, 2023, has seen a notable recovery, particularly evident in the 16.51% year-to-date increase in the S&P 500. However, the misconception that a percentage loss can be easily offset by an equivalent gain is debunked through a simple arithmetic example. The lingering impact of a -19% loss in 2022 means that a substantial 23.5% gain is required in 2023 for an investor to return to their initial portfolio value. With only a short time left in the year, reaching this threshold seems improbable, emphasizing the importance of patience in the face of market fluctuations. This underscores the danger of impulsive decisions during tumultuous times, cautioning against "The Big Mistake" of buying high and selling low. The advice to "don't just do something, stand there" serves as a reminder to resist hasty actions and await the resolution of market turbulence, highlighting the enduring significance of patience in sound investment strategies.
It has been a while since I last included a song of the week and since we have so many new readers in the last few months, now seems like a great time to get back in the habit! You can find the song of the week below: