Good morning & happy Monday!
“Experience is a hard teacher because she gives the test first, the lesson afterward.”
– Vernon Law, former MLB pitcher
Now that we are a week into 2024, I wanted to take a look back at 2023 and the lessons it can teach us … if we are willing to learn.
Before I dive into the charts, I would like to remind us all where we were entering into 2023. 2022 brought a year where the S&P 500 dropped by over 18%, the NASDAQ was down 32+% and even bonds were down over 13%. Virtually everything in 2022 went down. It seemed that there was no safe place to hide in 2022.
Entering 2023 there was not a lot of optimism. I was at a conference in February and there were 4 different super smart financial analysis who all agreed with the general consensus “things are bad and it’s going to take a long time for them to get better.” Virtually every webinar presenter said the same thing. I have a screenshot of a headline on Fox Business from February 21st that says, “US stocks are in a ‘death zone’ and could sink 26%, Morgan Stanley warns.” A CNBC headline from July 10th says, “Citi downgrades U.S. stocks sees S&P 500 pull back 9% to 4,000.”
Yeah, optimism was hard to find a year ago.
My Monday morning memo a year ago (January 9, 2023) stated in part “our core investment strategy over these 3 years, which – simply stated – has been: stand fast, tune out the noise and continue to work your long-term plan. Needless to say, that continues to be my recommendation, and in the strongest possible terms.”
Well, your patience paid off in 2023. Double digit returns in most equity asset classes (26.0% for S&P 500, 15.9% for Dow, 18.2% for foreign stocks, 10.1% for emerging markets, and a staggering 44.5% for the NASDAQ). Bonds rebounded too with growth of over 5% in 2023.
My advice a year ago of “stand fast, tune out the noise and continue to work your long-term plan” was right then … and I still 100% believe it is right today!
Ok, on to some specific 2023 commentary.
Take a look at this chart:
Yeah, that’s a busy chart. This lists the major asset classes:
- Large Cap = large U.S. based company’s stock
- Small Cap = small U.S. based company’s stock
- DM Equity = developed markets (example: Europe, Japan) based company’s stock
- EM Equity = emerging markets (example: India, South Korea) based company’s stock
- REITs = real estate
- Comdty = commodities (gold, oil, etc.)
- Fixed income = bonds
- High yield = high yield bonds (sometimes referred to as “junk bonds”)
- Cash = bank instruments (savings, money market, CDs)
- Asset Alloc = an asset allocation of a bit of each of the above listed asset classes
The top left column under “Ann.” shows the average annual return for that asset class for the 15 year period of time from 2009-2023. The 2nd column “Vol” refers to the volatility (how much it goes up & down) of each asset class. For the entire chart the box on the top is the highest and the box on the bottom is the lowest.
In this first section you will see that large U.S based companies’ stock (Large Cap) were the top performing asset class for the last 15 years with an average rate of return of +14.0%. If you look at the next column you will find that the large cap volatility was in the middle of the pack with 16.1% average 15-year volatility (I think I’ll dive into volatility more in a future Monday morning memo, a fascinating topic … at least for a nerd like me 😊). As you can see “cash” is low on returns (+0.8% 15-year average), but obviously super low on volatility as well (0.7%).
Looking at the year 2022 you will see that the best performing asset class was commodities at +16.1%, cash was 2nd best at +1.5% … all other asset classes were negative that year, including brutal 24.9% drop for real estate (REITs).
When we turn our attention to 2023, we see that commodities were now at the bottom of the list and the only asset class with a negative rate of return (-7.9%). Large cap led the way (26.3%) with solid returns from developed markets (18.9%) and small caps (16.9%).
The main thing I would love for you to pull away from this chart is how little predictability there is. One year you might have an asset class the blows it out of the water, the next year it might be a massive drag on a portfolio. Look at real estate (REITs). 2020 it was the worst asset class, 2021 it was the best asset class, 2022 it was back to the worst asset class, 2023 it was in the middle of the pack.
So, what does this chart teach us? DIVERSIFICATION! Since we don’t know what the future will hold, we must diversify across stocks and bonds. With stocks we diversify across companies, asset classes, company size, countries, and industries, just to name a few. For bonds we diversify amongst issuers, duration, ratings, and yields, along with other factors.
Diversification is the simple principal of not having all your eggs in one basket … and it is absolutely critical when it comes to a successful investing strategy.
I have so much more to address from 2023, I’ll plan on continuing this analysis in the weeks ahead, but I’ll wrap up today’s comments with a simple thank you. Thank you for your trust, loyalty, and support in 2023 … I count it such an incredible joy to partner with you! I am so looking forward to what 2024 brings. It is beyond an honor to be on your team!
Make it a great week ahead!