2023 Q1 Investment Update

Dear Clients and Friends,

The New Year is in full swing and we have hit the ground running in 2023. The Vance Wealth team was able to re-charge around the holidays and are eager to begin making progress on our 2023 team and individual goals. We begin this year optimistic; hoping this year can bring more positive trading days than negative ones. When we discuss market volatility when markets are good, our tendency is to shrug it off and try to enjoy the market rally. But, when you are in the eye of the storm like we were in 2022, it is hard to not let emotion get in the way of making sound financial and investment decisions.

For the S&P 500, 2022 was a difficult year, as the index was down (-19.44%) – its worst year since 2008 (-38.49%). Energy and Utilities were the only positive sectors for the year, up 65.7% and 1.60% respectively1. I believe the hardest figure to stomach was the decline of fixed income investments, also known as bonds. We recently lived through the worst year for U.S. Bonds: the Barclay’s Aggregate Bond Index lost (-13.0%). We’ve discussed this before; 2022 was different. Historically, during stock market selloffs, investors have tended to move to bonds as a perceived safe-haven asset, driving bond prices higher and yields lower. However, this trend broke in 2022, leading some investors to question the value of owning bonds as a potential portfolio stabilizer.

Several macroeconomic trends contributed to the underperformance of bonds. Most of the decline in prices and rise in yields can be attributed to elevated inflation levels, aggressive monetary policy tightening by the Fed, and shrinking investor appetite for fixed income during a rising-rate environment. Although we acknowledge that investors are not accustomed to seeing price declines in bonds (especially not double-digit declines), this truly has been a historical outlier. Historically, bonds have tended to be less risky than stocks over the long term and have provided portfolios with diversification and overall less volatility. While the pain was deep during the transition period of rising rates, bonds and cash are now paying decent rates again. This will help provide higher income to investors that own fixed income and cash investments.

At the end of 2021, I remember people I spoke with felt like you “couldn’t lose” investing in the market (this is a bad sign). Large tech was soaring and people were throwing money at big names like Amazon, Netflix and Apple to name a few. Large tech carried the S&P 500 performance in 2021 and a large portion of the return was attributed to the FAANG stocks. While it may be appropriate for some investors to own individual companies for a portion of their wealth, we prefer broad market exposure that tilts to areas of higher expected returns. The case for diversification was reiterated in 2022. While the S&P 500 lost almost 20%, a diversified portfolio held up even better. Here is a glimpse of broad market performance vs. the FAANG stocks as illustrated in the chart below.

As investors experience life events (retirement, inheritance, business sale), this may cause them to think “Is now a good time to invest.” This is understandable, coming off a very volatile year. In our opinion, if you are a long-term investor, it is always a good time to invest. Retirees may say, “I’m 65 and retired, I don’t have a long-time horizon.” We would argue that they do, they may have monies they won’t spend for 20 or 25 years. As investors experience those life events, they ask themselves, “What if I had invested at exactly the wrong time?”

Date: 10/9/2007 – 10/14/2021

From the beginning of 1926 through the end of 2021, the average annual compound return of the Standard & Poor’s 500-Stock Index was slightly greater than 10%. Over this period, the single worst day to invest in the S&P 500 since the end of the Second World War was Tuesday, October 9, 2007. If you invested on this day, the net effect of all this on the S&P 500 was that in the 17 months (to the day!) October 9, 2007 to March 9, 2009, it declined 57%2.

If you maintained faith, patience, discipline, and stayed true to the course, the average annual compounded return since October 9th, 2007 was 10%. Therefore, if the only investment you ever made in the S&P 500 took place on that single day, it took only about six years (until 2013) for the Index to regain its 2007 peak on that day, and only about eight more years until you achieved the equity market’s quite handsome long-term average return. Being a successful lifetime investor takes patience. We know it is easier said than done, but a good financial advisor can provide that layer of protection to avoid making emotional decisions with the money you have worked so hard to save. Their job is to educate and revisit your long-term investment and financial plan to show you, “we’ve planned for this.”

If you would like to discuss your long-term financial plan in greater detail or would value a review of your current investments, please contact our office to schedule time with one of our Wealth Advisors. If you are not currently a client and value a second opinion, we are here to help. Now is a better time than ever to look at your current investments and financial plan to make sure they are properly positioned for the unexpected.

Regards,

Jerrod Ferguson, CFP® Vice President

Disclosures: The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Past performance does not guarantee future results. The information provided is for educational and illustrative purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor. All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. Vance Wealth, Inc. (“Vance Wealth”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Vance Wealth and its representatives are properly licensed or exempt from licensure. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index. “Diversified portfolio” assumes the following: 25% S&P 500, 10% Russell 2000, 15% MSCI EAFE, 5% MSCI EME, 25% Bloomberg US Aggregate, 5% Bloomberg 1-3m Treasury, 5% Bloomberg Global High Yield Index, 5% Bloomberg Commodity Index and 5% in the NAREIT Equity REIT Index.

Sources:

1. JP Morgan – Guide to the Markets Q1, 2023
2. Source: Nick Murray, Ibboston/Morningstar, Yardeni Research, Standard & Poor’s. Average annual compound return October 2007 – August 2021: DQYDJ.com

“Historical Return Calculator.” Compound return assumes the reinvestment of all dividends and the payment of all taxes from another source.