2022 wasn't the worst year on record for stocks, but it was the worst simultaneous year in modern history for both stocks & bonds.
U.S. stocks posted a -19.77% calendar year return and bonds weren't that far behind at -13.01%.
Even alternative asset classes we all become suddenly interested in when stocks are scary also performed poorly. Gold (-0.74%), Real Estate (-26.03%), and Bitcoin (-81.02%) all declined in value last year. There really wasn't any place to invest that didn't end up a loser in 2022.
I want to emphasize that market downturns are expected. However, for more than 100 years of stock market history, downturns have always been temporary. What you choose to do during these downturns plays a significant role in how well (or poorly) you do in the long run.
If you want to maximize your financial efficiency during this downturn, here is where I recommend you focus your efforts in 2023.
ASSET ALLOCATION
If you decided to sell to cash last year, I have some bad news for you.
You locked in your losses and already missed the 6.4% rebound since October 17th, 2022.
Want to know what the cost of missing the best days in the stock market?
Tweaking these numbers a little bit, let's apply what would've happened to a $500,000 portfolio over that same 25-year period.
Staying fully invested: $5,183,500
Missed the best week: $4,326,000
Missed the best month: $4,326,000
Missed the best quarter: $3,654,000
Missed the best 6-months: $3,364,000
The difference between staying invested and missing the best consecutive 6-months is a staggering $1,819,000. Close your eyes for a minute and just think what an extra $1.8M could do for you.
Ask yourself what's worse, getting used to occasional and temporary market declines or not having an extra $1.8M?
Easy answer for 90% or more of the population.
Over my career (3 different bear market recessions), I've lost count of how many times I've heard people say "I'll get back in when things turn around".
The first issue is that you probably waited way too long to get out in the first place.
The second issue is that unless you time the bottom perfectly, you're guaranteed to miss at least part of the rebound. This ultimately means you sold low and bought high. Yikes!
Reacting emotionally to temporary stock market declines might make you feel better in the short term, i.e., I'm doing something. However, even the best money managers in the business can't get this correct with consistency.
My advice is to stick to your long-term investment plan. Trust the process of keeping things as they are during both market ups and downs.
YOUR FINANCIAL PLAN
Let's say your financial plan looked great 18 months ago. You had a 90% probability of success modeled over a very long retirement (such as all the way to age 95).
But then this happened.
Then this happened.
Now your financial plan shows a 65% probability of success and you're freaking out.
Don't. Here's why.
Your financial plan success rate is measured by taking a snapshot in time. If that snapshot occurs during the peak of a bull market, things are going to look great.
If you measure during the bottom, then things aren't as rosy.
The problem with a financial plan's probability of success metric is that it's often better or worse than reality.
It's like if your doctor measured your blood sugar (A1C test) right now. It's probably going to be higher than normal because we just came off the holidays and all the sugary goodies you ate!
It doesn't mean that over the course of a year, you had consistently high blood sugar. It means that the time the test was performed wasn't exactly representative of your average reality.
It's the same thing with testing a financial plan. Try to take your results with a grain of salt.
Still, if your financial plan doesn't look as good as you want it to, my advice is twofold.
First, understand that as the market comes back and your balances appreciate, your plan's success metric will also improve without you taking any action other than just sitting tight.
Second, be flexible. If you're worried, do something. Instead of committing to the same expenditures as you did last year, dial it back. Take 1 or 2 trips instead of 3. Eat out less. Figure out how to postpone buying a new car or starting a big home improvement project.
We call this concept of flexibility "guardrails".
CONTRIBUTIONS
This out goes out to all the accumulators still working. Here are your 2023 contribution limits to aim for.
401(k)/403(b): $22,500 per individual + $7,500 "catch up" for folks over 50. That's up to $30,000 to simultaneously save for retirement as well as reduce your tax bill.
IRA/Roth IRA: $6,500 per individual + $1,000 "catch up" for folks over 50. That's up to $7,500 per person.
Spousal IRA/Roth IRA: if you work but your spouse doesn't, as long as you file jointly and collectively declare more Earned Income than contributions, your spouse can contribute as well.
HSAs: individuals can make a $3,850 contribution. If your policy covers more than just yourself, then you can make a family contribution of $7,750. If you are 55 or older, you can tack on an additional $1,000 for a potential total of up to $8,750. Be sure to check eligibility HERE.
529 Plans: parents and grandparents can set up state-specific 529 plans to help cover college costs for kids & grandkids. Prior to December's SECURE ACT 2.0, we all feared there would be leftover $$$ in a plan that would go unused. Under the new rules, leftover 529 plan money up to $35,000 can be rolled over directly into a Roth IRA for the child who went/was supposed to go to college.
Taxable Trust & Brokerage: this is where most folks should save after maxing out everything else on this list. Take a look at cash at the bank. For most folks, anything more than $30,000 stashed at the bank is overkill. Put that money to work for the long term.
That's potentially a lot of savings. You might be thinking there's no way I can achieve all that. Everything costs way more than it did last year. I know, I get it.
At the same time, you got used to a certain lifestyle and standard of living during the pandemic. It's time to face some reality.
The choice you have right now is that there's only so much cash flow at the end of the day. Will you reduce your lifestyle expenses so you can hit those savings numbers or will you tell yourself that you deserve your current spending-based lifestyle?
Either answer is fine. Just understand and acknowledge the full extent of the tradeoffs you're making with your decision to not max contributions out.
CONCLUSION
For the overachievers, click the link below for a full checklist of financial items to check in on in 2023.
There's a lot there, so if you're not sure why something is on that list or if a particular question applies to you or not, just ask.
I hope 2023 brings you health, leisure time to focus on your hobbies, and low stress.
Use the "Contact" link at the top of this page to shoot me a message about your situation. I'd love to help.
Thanks for reading and have a wonderful day!
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