Renewed Goals and Aspirations as We Look into the New Year

With 2022 now behind us, not only do we have the opportunity to plan ahead, but also to take a moment to reflect on the year that passed. In the financial markets, as within our personal lives, we must take the good with the bad, adapt to new and changing circumstances, and learn from our mistakes. 2022 was a year where most asset classes struggled (94% of asset classes lost money per Morningstar) and where traditional diversification did not quite diversify. In fact, 2022 was the worst year for bonds and the 7th worst for stocks since 1926 (see table below). Given this, you may question whether 2022 was a year where we were handed lemons but not given the opportunity to make lemonade. On the contrary, one of the largest asset managers argues that 2022 provided A once-in-a-generation tax loss harvesting opportunity for bonds, specifically noting the tax loss harvesting opportunities found not only in equities, but also in fixed income. Essentially, with negative returns across most asset classes, investors were able to tax loss harvest, or realize investment losses to offset future investment gains. 

As we kickoff 2023 we find ourselves in a challenging environment given inflation and monetary policy uncertainties, to name a couple. These uncertainties will adapt and change as the economy evolves throughout the year providing opportunities for investors, and although we do not have a crystal ball that allows us to look into the future, we can look at the past for a range of future possible outcomes. The table above not only shows the worst 10 calendar years for bonds and U.S. stocks, but also the returns for the following 12 months. We can see that, on average, both bonds and U.S. stocks return positive mid single-digit returns. That is not to say that this trend will continue, but it does illustrate the possibility for brighter times ahead. The table below illustrates all the negative calendar year stock returns since 1926 and the subsequent 12-month returns.

The results on the table above are aligned with the ones in the previous table illustrating an average positive return for the 12 months following negative returns emphasizing the uncertainty and volatility experienced in considerably short time periods. 

Lastly, given the uncertain and evolving investment landscape, portfolios should be positioned in a diversified manner that allows them to withstand short-term fluctuations while seeking competitive longer-term results. As noted earlier, traditional portfolio diversification struggled in 2022 and the benefits of diversification may seem like a losing proposition for investors when looking at short-term periods. The table below, however, compares the results of a diversified portfolio with the S&P 500 over the long-term and illustrates the possibility for higher returns. 

 Cesar Ortega,

Associate Portfolio Manager

This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.

Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. Past performance is not a guarantee of future results.

Diversification and asset allocation do not ensure a profit or guarantee against loss. 

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