Fourth Quarter & Full Year 2022 In Review

Summary

There's no way to sugarcoat it: 2022 was a lousy year for investors.

Here's how some of the big indices closed out the year:

  • S&P 500 Index (large cap U.S. stocks): -18.11%

  • Dow Jones Industrial Average (large cap U.S. stocks): -6.86%

  • Russell 2000 Index (small cap U.S. stocks): -20.44%

  • Nasdaq Composite Index (tech-heavy U.S. stocks): -33.10%

  • MSCI EAFE Index (international stocks): -14.45%

  • Barclays U.S. Aggregate (bonds): -13.01%

Despite posting net losses for the year, there was a ray of hope as most of the big indices actually rallied during the fourth quarter. The exception was the Nasdaq, which showed a slight loss:

  • S&P 500 Index (large cap U.S. stocks): 7.56%

  • Dow Jones Industrial Average (large cap U.S. stocks): 16.01%

  • Russell 2000 Index (small cap U.S. stocks): 6.23%

  • Nasdaq Composite Index (tech-heavy U.S. stocks): -1.03%

  • MSCI EAFE Index (international stocks): 17.34%

  • Barclays U.S. Aggregate (bonds): 1.87%

Way back in May, when it was obvious financial markets were really struggling, I wrote the following:

"Given the recent declines in the financial markets, I think it's a good time for a reminder: In the short run, investments don't always go up.

No one likes seeing losses in their portfolio, but it's unavoidable. Fortunately, we can zoom out and the long-term picture is an upward trend."

You can see this upward trend in action in this view of the S&P 500 Index from 1996 through 2022:

Can't read this? Here's a link to a PDF of this chart.

When looking at the chart, note the gains or losses for each of the green trend lines. Spoiler: The gains far outweigh the losses over this time period.

Full Year 2022 Numbers

The average diversified U.S. stock fund, which is a better measure of how we invest than the S&P 500 or the Dow, ended 2022 down just over 18%. Big tech stocks, such as Alphabet, Amazon, and Apple, were hit especially hard during the year, with the tech-heavy Nasdaq Composite Index down 33.1%. Investors, perhaps following a "buy the dip" approach, invested nearly $12 billion in U.S. stock funds during the year.
 
International stocks performed slightly less worse than domestic stocks, with the average diversified international stock fund down a hair over 17% during the year. Investors, perhaps spooked by geopolitical issues, appeared to have little faith in international stock funds. During the year, over $51 billion was withdrawn from funds in the category.

Bonds, typically considered "safe" investments, also had a lousy year. The average intermediate-term bond fund lost 13.5% during 2022. Investors, realizing bonds weren't "safe", pulled over $336 billion out of bond funds during the 2022.

Returns By Broad Category

Can't read this? Here's a link to a PDF of this chart.

The chart above provides a high-level view of how the broad asset categories have fared annually from 2008 - 2022.

The category titled "Asset Alloc." refers to a 60% stock, 40% bond portfolio. Note how the classic 60/40 portfolio, long considered an ideal allocation for retirees, was down nearly 14% in 2022. The financial media is on the case, writing articles with titles like, "Is the 60/40 Dead?" and "The 60/40 Portfolio is Officially Over". I disagree with those extreme takes, but my take, possibly titled "The 60/40 is Down This Year, But It's Fine - Especially If It's the Correct Allocation for Your Goals", won't generate clicks.

I love this chart and always look forward to seeing the updated version. Two takeaways:

  1. Notice any patterns? If you answered "yes", we need to talk because your brain operates on a different level than mine. It's impossible to consistently predict which categories will perform best from year-to-year or month-to-month.

  2. This chart is Exhibit A for why it's prudent to build diversified portfolios. Sadly, diversification means you're always having to say you're sorry because it's rare for every category to produce positive returns. This fact was especially true in 2022.

As far as the chart goes, the only "winners" for 2022 were commodities and cash, up 16.1% and 1.5%, respectively. 

What's Next?

No one can predict what 2023, and beyond, will mean for financial markets and investors, so I'll keep it simple and repeat some of the things I've said previously:

  1. Stick to your financial plan. If you're a client, you already have a financial plan in place - one that takes downturns into consideration. If you're still concerned, or if something in your life has changed, you can always contact me. Not a client? Feel free to schedule an initial consultation if you want to talk about creating a financial plan.

  2. Don't check your portfolio daily, weekly, or even monthly. Investing is a marathon, not a sprint.

  3. Steer clear of financial "news" from sources like CNBC.

  4. Have surplus cash? If so, take advantage of the decline in financial markets by investing while things are on sale.