October 2022 – Quarterly Update

FROM THE VAULT 10/14/22: October 2022 / Quarterly Update

Markets

After the close on September 30, 2022, the S&P is down over 25% for the year. This marks the 6th worst calendar year of returns over nearly the past century. For equity markets, drawdowns are common and to be expected. In other words, this is normal. As Ben Carlson noted:

The average drawdown over this 94-year period is -16.5%.

In 59 out of those 94 years, losses were over 10%.

In 24 out of those 94 years, losses were over 20%.

In 10 out of those 94 years, losses were over 30%.

In 6 out of those 94 years, losses were over  40%.

Stocks (Equity)

For those nearing retirement (especially without a plan), reading the headlines combined with declines in statement values can be upsetting. However, if you’re still in the process of accumulating wealth, you should be grateful for a lower entry point. When discounts are offered, take advantage. To receive equity-type returns, you have to take an equity-type risk. This risk is usually associated with volatility. We have recently seen heightened volatility, but time is your friend, and history shows that indices travel higher over time. It’s essential to be part of that journey. Volatility is the price of admission.

The only years with greater volatility at this point are:

1930 (2x - Great Depression, WWII)

2002 (Dot-Com Crash)

2008 (Financial Crisis)

2020 (Covid)

Bonds (Credit)

One of the most popular methods for limiting volatility and smoothing returns is to diversify among uncorrelated assets within a portfolio. The most popular portfolio construction among financial advisors includes dedicating a portion of a portfolio to bonds (particularly, US Treasuries) to hedge against the volatility of equity markets. US Treasuries are favored because they are broadly considered the ‘safest’ investment in the world as they are backed by the full faith and credit of the U.S. government. The bond/stock hedging strategy has traditionally been successful because never in the history of an extreme drawdown in stocks, have treasuries gone down more than stocks…until now.

We made the tactical decision to mitigate these risks for our investors over the past few years by substituting the bond portion of this strategy for cash or very short-term bonds. This did not work during the beginning stages of COVID, but we did not feel the few extra basis points in yield were worth the duration risk. However, with rates where they are today, we now feel that you can put together a bond portfolio that pays enough interest to warrant exposure across portfolios.

Feel free to reach out with any questions or further discussion.

- Brandon

 

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